Euro zone bond yields fall ahead of Trump's tariff deadline

Euro zone bond yields headed for their largest weekly fall in a month on Friday as investors prepared for several days of uncertainty heading towards U.S. President Donald Trump's July 9 tariff deadline. Germany's 10-year benchmark Bund yield was down 3 basis points (bps) at 2.549%, having risen to an almost six-week high on Wednesday of 2.632% when UK gilt yields jumped due to renewed concerns over fiscal sustainability. Bond yields move inversely with prices.

Bunds were set for a weekly decline of 4 basis points, the largest since the week of May 26, according to LSEG data. Britain's 10-year gilt yield was down 1.6 bps on Friday at 4.525%, having risen as high as 4.681% on Wednesday.

Wednesday's sharp collapse in British government bond prices was sparked by a U-turn on planned government cuts to welfare spending and a tearful appearance by finance minister Rachel Reeves in parliament. Euro zone bonds had slipped in tandem with their British counterparts, led by those countries with their own shaky public finances, such as France and Italy. Those bond markets were also recovering on Friday.

France's 10-year yield was down 1.8 bps at 3.26% while Italy's was down 2.5 bps at 3.456%. The spread between Italian and German 10-year yields stood at about 90 bps.

U.S. bond markets were closed for the Independence Day holiday. Markets were turning their attention to next week's tariff deadline, with the 90-day pause that Trump activated following the market chaos unleashed in April set to expire on July 9.

Germany's 10-year Bund yield had its narrowest monthly trading range since 2021 in June, Commerzbank said earlier this week, as calm returned to markets during the tariff pause. "The market is waiting to see what happens with the tariffs in the United States," Birgit Henseler, senior analyst at DZ Bank, said.

Henseler added that there could be increased volatility in the next week as details emerge about Trump's plans for import tariffs with the United States' major trading partners. Focus this week has also been on the European Central Bank's annual forum in Sintra, Portugal, with policymakers strongly hinting at a pause to the rate cutting cycle later this month after 200 bps of easing in just over a year.

Futures are pricing in just 1.5 bps of ECB easing in July, implying about a 5% chance of a rate cut. By December, markets are pricing in about 28 bps of easing, implying just one more rate cut by the end of the year. "Absent a catalyst like a further escalation in the trade war ... a sharp front-end repricing is unlikely," Barclays rates strategist Rohan Khanna said in a note.

Germany's two-year yield, which is sensitive to changes in European Central Bank policy expectations, was last down 3.5 bps at 1.805%, but remained well within its recent narrow range.

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