Bond Yields Rise Amid Trade Policy Uncertainty

Euro zone bond yields increased as investors remained uncertain about U.S. tariffs and anticipated upcoming central bank meetings. Trump's potential tariffs on various imports heightened tension, impacting yields. Germany's 10-year bond yield saw minor movements, with Italy's showing larger shifts. ECB and Federal Reserve strategies remain closely watched.

Euro zone bond yields edged higher on Thursday, as investors remained uncertain about U.S. President Donald Trump's trade policies and anticipated central bank meetings set for next week. Trump refrained from imposing tariffs on U.S. imports immediately upon returning to the White House. However, he indicated potential tariffs of 25% on Canada and Mexico, and 10% on China, starting February 1.

Additionally, Trump has pledged to impose duties on European Union imports. This uncertainty has prompted a cautious approach from investors, resulting in minimal movement in Germany's 10-year bond yield, which serves as the euro zone benchmark, increasing by less than 1 basis point (bp) this week.

Yields jumped in early January due to fears that tariffs could exacerbate U.S. inflation risks amid a burgeoning economy. Germany's 10-year bond yield reached a seven-month high of 2.63% on January 15, before plunging after core U.S. consumer price inflation fell short of forecasts. "Although we foresee rates drifting lower in the coming months, uncertainty over tariffs and inflation will likely prevent a significant rally," stated Mohit Kumar at Jefferies.

(With inputs from agencies.)