Euro zone yields rise as US-China tensions ease, await US data

By Stefano Rebaudo

May 2 (Reuters) - Euro zone government bond yields rose on Friday, catching up with U.S. Treasuries, as investors scaled back bets on European Central Bank rate cuts amid signs of potential easing trade tensions between the United States and China.

China's Commerce Ministry said Beijing was "evaluating" an offer to hold talks with Washington over U.S. tariffs, signalling a potential de-escalation in the trade war, which has roiled markets.

Germany's 10-year yield, the benchmark for the euro zone, rose 2.5 basis points to 2.47%, though it remained near the bottom of its recent range.

The Bund yield has been driven by expectations that the ECB will continue cutting interest rates to support the bloc's economy in the face of tariffs, as well as broader flows to safe havens amid global uncertainty.

U.S. Treasury yields dropped in London trade - with the 10-year down 2.5 bps at 4.21% - after rising on Thursday following a better-than-expected manufacturing report for April.

Continental European markets were shut for a holiday on Thursday.

Money markets priced in an ECB deposit rate of 1.65% in December, which implies 60 bps of rate cuts from the current 2.25%, compared with 1.6% the day before. They also fully price in a 25 bps cut in June and two cuts by September.

Markets sharply increased bets on the ECB easing after the mid-April meeting, when the bank suggested it was ready to offset the adverse impact of tariffs with rate cuts. They scaled back these bets following signs that potential tariffs could be less severe than feared.

Euro zone inflation held steady after national data released this week provided a mixed backdrop: German inflation eased, figures from France showed a higher than expected rise, while Italy recorded an acceleration in core inflation.

Germany's policy-rate-sensitive two-year yield rose 6.5 bps to 1.76%.

"April's rise in services inflation is unlikely to worry ECB officials too much as it was probably driven mainly by Easter timing effects," said Franziska Palmas, senior European economist at Capital Economics.

"We think services inflation will start falling again in the coming months and that U.S. tariffs will prove disinflationary for the euro zone," she said.

The main event for global markets on Friday will be the U.S. non-farm payrolls report due at 1330 GMT, the first since early April's tariff announcements.

Economists expect job growth to have slowed in April, though companies continued to hoard workers.

Analysts flagged that labour market weakness can trigger a swifter reaction by the Federal Reserve.

Italy's 10-year yield was up 2.5 bps at 3.59%.

(Reporting by Stefano Rebaudo; Editing by Emelia Sithole-Matarise and Tomasz Janowski)