Euro zone yields edge higher; Trump tariffs and Dutch pension funds in focus

By Amanda Cooper and Lucy Raitano

LONDON, July 11 (Reuters) - Euro zone yields edged up on Friday, as traders awaited U.S. President Donald Trump's tariff decision for the European Union, after his surprise move to hit major trading partner Canada with a 35% duty.

Trump's letter to the EU announcing the tariff rate is likely to land on Friday.

Evelyne Gomez-Liechti, multi-asset strategist at Mizuho International, said euro zone bond yield moves showed some spillover from a steepening of the U.S. curve overnight.

German two-year yields DE2YT=RR were up 1.2 basis points to 1.903%, while those on the benchmark 10-year Bund DE10YT=RR were up 1.6 bps to 2.68%.

"There is uncertainty on what exactly the EU is going to get ... risk assets are not liking that," said Gomez-Liechti, highlighting European equities, which were down 1% at 1030 GMT.

Friday's cautious mood notwithstanding, Bund yields were heading for a weekly rise of nearly 12 bps, their largest since early March, when the German government unveiled the biggest overhaul in its borrowing rules in modern history.

Even with the concern about the hit to the export-driven EU economy from U.S. tariffs, the worry about how much extra debt European governments will have to issue to fund their pledges to spend big on defence and infrastructure is winning out right now at the longer end of the bond curve, analysts said.

"We maintain the view of staying away from the long end in US, Europe and the UK given fiscal concerns. Thus, all our long positions are focused towards the 5-year sector of the curve," Jefferies strategist Mohit Kumar said in a note.

Germany's 30-year bund yield DE30YT=RR was last up 2 bps to 3.218% - its highest since March and also on track for its biggest weekly rise since March.

The Financial Times on Thursday reported that Dutch pension funds were set to sell 125 billion euros in government bonds, something Kumar said had been "widely telegraphed" but nonetheless had knocked longer-dated paper.

Mizuho's Gomez-Liechti said the long-end part of the curve was not offering enough yield to attract buyers.

Dutch pension funds make up 40% of the euro zone private pension industry, making them influential bond investors.

In other markets, Italian 10-year BTP yields IT10TY=RR were up 2 bps at 3.602%, while 10-year French yields FR10YT=RR were up 1.3 bps at 3.404%.

Less than two weeks remain before the European Central Bank's next meeting on July 23.

On Friday, ECB governing council member Fabio Panetta said the ECB should continue to loosen monetary policy if threats to economic growth from international trade tensions and geopolitical instability boost current disinflationary trends.

Elsewhere, ECB board member Isabel Schnabel was quoted in an interview as saying the hurdle for another ECB rate cut was "very high" as the euro zone economy is holding up better than expected despite uncertainty over trade.