Euro zone bond yields dip after ECB cuts rates and flags tariff risks

(Updates after ECB rate cut)

By Harry Robertson and Stefano Rebaudo

April 17 (Reuters) -

Euro zone bond yields fell on Thursday after the European Central Bank cut interest rates as expected and said U.S. President Donald Trump's tariffs would knock the euro zone economy.

Germany's 10-year bond yield, the benchmark for the euro zone bloc, was last up 1 basis point (bp) at 2.513%, having traded 3 bps higher before the decision.

The ECB

cut rates

by 25 bps to 2.25%, its seventh reduction in a year as inflationary pressures dwindle and Trump's tariffs threaten to damage an already fragile euro zone economy.

"The outlook for growth has deteriorated owing to rising trade tensions," the central bank said in a

statement

.

Germany's two-year bond yield, which is sensitive to European Central Bank rate expectations, was last down 2 bps at 1.773% - from 1.81% just before the ECB decision.

Money markets were last pricing in an ECB main rate of 1.68% by the end of the year, from around 1.71% before the announcement.

Bond markets have been volatile since Trump announced sweeping tariffs on April 2, even after he rolled most of them back, as investors struggle to gauge where his policies are headed.

Trump said there was "big progress" in preliminary talks with a Japanese trade delegation in Washington about the barrage of tariffs he has imposed.

Investors have favoured German bunds as a safe-haven asset, helping yields fall to their lowest since chancellor-in-waiting Friedrich Merz announced a dramatic boost in government spending in early March.

Italy's 10-year yield was up 2 bps at 3.709% - from 3.72% beforehand.

The closely watched gap between Italian and German yields stood at 119 bps. Last week, credit rating agency S&P upgraded Italy's long-term ratings to "BBB+" from "BBB". (Reporting by Harry Robertson and Stefano Rebaudo, editing by Ed Osmond)