Impact of Trump's Tariffs: Euro Zone Bond Yields Decline

Euro zone bond yields declined after President Trump announced a 25% tariff on imported vehicles, impacting Germany's car-centric economy. Traders expect ECB interest rate cuts, with bond yields in Germany and Italy reacting to anticipated economic growth challenges stemming from increased tariffs and subsequent cost escalations.

Euro zone bond yields experienced a decline on Thursday, shortly after U.S. President Donald Trump revealed his decision to impose a 25% tariff on imported vehicles. This development has raised concerns for the bloc's economy, particularly given Germany's strong emphasis on car manufacturing. Notably, Germany's 2-year bond yield, which is notably sensitive to the European Central Bank's interest rate forecasts, dropped by 5 basis points in early trading, hitting a low of 2.07%, the lowest point since March 4.

This announcement has prompted traders in money markets to increase their expectations for ECB interest rate reductions. The market has now priced in a rate of 1.94% by year's end, compared to 1.98% the previous day, with current rates at 2.5%. These new vehicle tariffs are set to be implemented on April 3, a day after Trump plans to introduce reciprocal tariffs targeting countries contributing significantly to the U.S. trade deficit.

Daniel Bergvall, head of economic forecasting at SEB, commented, "The escalation risks further dampening growth in several countries through cost increases and generally increased uncertainty." Germany's 10-year bond yield, the eurozone benchmark, saw a 4 bps drop to 2.755%. Meanwhile, Italy's 10-year yield decreased by 3 bps to 3.869%, with the yield gap between Italian and German 10-year bonds remaining stable at around 109 bps.

(With inputs from agencies.)