UPDATE 2-German short-dated yields fall after tariff threats, Bunds unchanged

‌German short-dated government bond yields fell after fresh tariff threats from U.S. President Donald Trump, while benchmark Bund yields were little changed after dropping early in the session. The yield on the benchmark U.S. 10-year Treasury note 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.

‌German short-dated government bond yields fell after fresh tariff threats from U.S. President Donald Trump, while benchmark Bund yields were little changed after dropping early in the session. Trump on Saturday threatened to slap extra tariffs on eight European ⁠nations until the U.S. is 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 yen and Swiss franc as investors moved to safe-haven assets. German 2-year yields, ​more sensitive to expectations for policy rates, were down 4 basis points to 2.08%, after hitting a fresh 1-1/2-month low at 2.072%.

HARD TO PREDICT ‍NEXT STEPS "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, mentioning risks of negative consequences for both Europe and the U.S. economy.

"It seems markets have given up predicting next steps from the U.S. administration, but I think it ⁠would be ‌naive to say that nothing is going ⁠to happen," he added. Market bets on European Central Bank policy rates shifted to the dovish side, with traders pricing a 20% chance of a 25-bp rate hike by April 2027, ‍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. Germany's 10-year yields were down ​just 1 bp at 2.83%. They rose 1.3 bps last week. Bond yields move inversely to prices.

"We do not expect a material risk-off, ⁠despite recent developments," said Barclays in a research note, after recalling that the lesson of 2025 was that investors should ignore the constant noise and headlines and focus on underlying macro data and the ⁠sustainability of the AI narrative. FRANCE CLOSER TO BUDGET DEAL

Italy's 10-year government bond yields were flat at 3.42%. The gap versus Bunds was at 57.86 bps, after it tightened to 53.50 bps late on Friday, its lowest since August 2008. The spread between Spain's yields and safe-haven Bunds was at 38.19 ⁠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.

French long-dated bonds outperformed, with ‌yields down 3 bps to 3.49%, as France moved closer to a 2026 budget deal. The yield on the benchmark U.S. 10-year Treasury note 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.

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