Euro zone bond yields rise after US-Japan trade deal

By Stefano Rebaudo

July 23 (Reuters) - Euro zone government bond yields rose on Wednesday, as Japan’s trade deal with Washington revived hopes of further agreements and eased concerns over the impact of U.S. tariffs.

Euro area borrowing costs fell over the past two sessions as investor focus shifted to the deflationary fallout from potential U.S. trade duty increases and a strengthening euro.

U.S. President Donald Trump struck a trade deal with Japan that lowers tariffs on auto imports and spares Tokyo punishing new levies on other goods in exchange for a $550 billion package of U.S.-bound investment and loans.

A rally in Japanese shares led Asian markets and European stock futures on Wednesday.

Germany’s 10-year government bond yield DE10YT=RR, the euro area’s benchmark, was up 2.5 basis points (bps) at 2.61%, after dropping more than 10 bps in the last two sessions.

German 2-year government bond yields DE2YT=RR – more sensitive to expectations for European Central Bank policy rates – rose 1.5 bps to 1.81%.

Money markets are fully pricing in one 25-bp ECB rate cut by December EURESTECBM4X5=ICAP, and around a 50% chance of that move coming in September EURESTECBM2X3=ICAP.

Italy’s 10-year government bond yields IT10YT=RR were up 2 bps at 3.48%, with the spread between BTP and Bund yields - a market gauge of the risk premium investors demand to hold Italian debt - at 86.5 bps. It hit 84.20 bps in June, its lowest since March 2015.