Euro zone bond yields rise as markets eye Fed under Warsh

By Stefano Rebaudo

Feb 3 (Reuters) - Euro zone government bond yields rose on Tuesday, taking the lead from U.S. Treasuries as markets assessed how Kevin Warsh, tapped to be the next Federal Reserve chair, could shape the Fed’s policy trajectory.

Warsh, President Donald Trump's nominee to be Fed chair, has called on the central bank to lower rates, highlighting stronger productivity growth from AI. But he has also called for a smaller balance sheet, a combination analysts say points to a steeper yield curve.

Germany’s 10-year government bond yield DE10YT=RR, the euro area’s benchmark, rose one basis point (bp) to 2.88%. It reached 2.94% in March last year when Germany announced plans to massively increase fiscal spending.

U.S. Treasury yields rose in early London trade with the 10-year up one bp at 4.28%, after rising on Monday as traders considered Warsh’s potential impact on monetary policy.

German two-year government bond yields recorded in January their largest monthly drop since last April, driven lower by investors betting the European Central Bank will factor in the deflationary drag from a stronger euro as it considers monetary policy.

They two-year yields DE2YT=RR were flat at 2.09%.

Money markets priced in around a 200% chance of an ECB rate cut in September EURESTECBM6X7=ICAP, and indicated a 30% probability of a rate hike in April 2027. EURESTECBM11X12=ICAP

The euro was at 1.18 against the greenback after hitting a five-year high at 1.20 last week after U.S. President Donald Trump said the value of the dollar was "great", when asked whether he thought it had declined too much.

France’s 10-year government bond yields FR10YT=RR were roughly unchanged. The gap versus Bunds was at 56 bps, after tightening to 53.50 in mid-January, its lowest level since August 2008.

Italy’s 10-year yields IT10YT=RR rose 0.5 bps to 3.50%. The gap versus Bunds was at 60 bps.