German short-dated yields fall after tariff threats, Bunds roughly unchanged

By Stefano Rebaudo

Jan 19 (Reuters) - German short-dated government bond yields fell after fresh tariff threats from U.S. President Donald Trump, while benchmark Bund yields were roughly unchanged after dropping early in the session.

Trump on Saturday threatened to slap extra tariffs on eight European nations until the U.S. was allowed to buy Greenland. European Union ambassadors have agreed to intensify efforts to dissuade the U.S. president, while preparing retaliatory measures should the duties go ahead.

Stock markets slid and the dollar was down against the safe-haven yen and Swiss franc as investors moved to safe-haven assets.

German 2-year yields DE2YT=RR, more sensitive to expectations for policy rates, fell 4.5 bps to 2.08%.

"The experience of the past 12 months has taught us not to overreact, as not all bold or dramatic announcements have ultimately been implemented," said Carsten Brzeski, global head of macro at ING, after mentioning risks of negative consequences for both Europe and the U.S. economy.

"The uncomfortable truth, however, is that some of them have," he added.

Market bets on European Central Bank policy rates shifted to the dovish side, with traders pricing a 20% chance of a 25-basis-point rate hike by April 2027 EURESTECBM11X12=ICAP, down from 40% late Friday.

They also saw a 15% chance of a rate cut by July this year, up from almost zero on Friday. EURESTECBM5X6=ICAP

Germany's 10-year yields DE10YT=RR were down one bp at 2.83%. They rose 1.3 bps last week.

Italy's 10-year government bond yields IT10YT=RR were flat at 3.42%. The gap versus Bunds was at 58.50 bps, after it tightened to 53.50 late on Friday, its lowest since August 2008.

The spread between Spain's yields and safe-haven Bunds was at 38.50 bps after dropping to 36.9 bps on Friday, the lowest since summer 2008.

Portugal's and Greece's spreads were also not far from their narrowest in almost two decades.

The yield on the benchmark U.S. 10-year Treasury note US10YT=RR rose 7 bps to 4.233% on Friday, its highest since September 3, as investors weighed mixed economic data and unprecedented pressure from the White House to cut interest rates.