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German bonds rise in contrast with U.S. Treasuries

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Benchmark US Treasury yield jumps 14 bps

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Markets add to ECB easing bets

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Trump's tariffs come into effect, triggering more market

turmoil

(Updates paragraph 1 and headline to focus on contrast with

U.S. Treasuries, adds news on EU counter-measures, updates

prices)

By Samuel Indyk and Lucy Raitano

LONDON, April 9 (Reuters) - German bond yields fell on

Wednesday, contrasting with a dramatic rise in U.S. yields as

the market turmoil triggered by U.S. import tariffs dented the

appeal of American assets.

U.S. President Donald Trump's tariffs on dozens of countries

took effect, including swingeing 104% duties on Chinese goods.

Beijing retaliated, saying it would impose 84% tariffs on

U.S. goods from Thursday, escalating a trade war.

That was followed by news the European Union will launch its

first counter-measures against Trump's tariffs next week.

Germany's 10-year yield, the benchmark for the

euro area, was down 5 basis points at 2.58%, having earlier

risen over 6 bps to 2.675%. Bond yields move inversely with

prices.

In contrast, the benchmark 10-year U.S. Treasury yield

was up 14 bps at 4.3996%, having earlier jumped as

high as 4.515%. The 10-year yield has surged over 40 bps from

its low earlier this week.

That widened the spread between German and U.S. 10-year

yields to around 182.73 bps.

"It doesn't make sense to look at yields in the euro area in

the same way as yields in the U.S.," said Anders Svendsen, chief

analyst at Nordea.

"In Europe at least, Bunds are becoming the safe asset again

and Treasuries are becoming less of that."

Initially, perceived safe assets such as U.S. Treasuries

were supported despite the market turmoil, but markets have sold

these in recent days in an apparent dash for cash.

"There are signs that the credibility and reliability of the

U.S. as a currency or trade partner is being put under pressure

and that translates into people selling Treasuries," said

Philippe Ferreira, deputy head of economics & cross-asset

strategy at Kepler Cheuvreux.

One of those signs was a poorly-received three-year note

auction from the U.S. Treasury on Tuesday. Another test for the

U.S. bond market comes later on Wednesday when the Treasury is

set to sell 10-year notes.

Others noted that hedge funds were at the heart of the

selling in U.S. Treasuries, which had borrowed to bet on usually

small gaps between cash and futures prices, the so-called "basis

trade".

"In case of an exogenous shock, the highly leveraged long

positions in cash Treasury securities by hedge funds are at risk

of being rapidly unwound," said Torsten Slok, chief economist at

Apollo Global Management, who estimated that the basis trade is

worth around $800 billion.

MORE RATE CUTS?

German shorter-dated bonds, which are more sensitive to

changes in interest rate expectations, were higher as investors

added to bets that the European Central Bank will cut interest

rates this year.

Shorter-dated yields have fallen as markets bet that global

central banks will lower interest rates at a faster pace in the

face of slowing growth following the tariffs.

The ECB is bracing for a bigger-than-anticipated growth hit

from U.S. tariffs, four sources told Reuters.

Comments from ECB policymakers have been mixed in their

response to Trump's tariff plan.

Joachim Nagel said on Tuesday that monetary policy would "do

its part" as global growth prospects had deteriorated massively,

while Olli Rehn said the trade war provided a stronger case for

a rate cut this month.

Others have highlighted the probable inflationary impact of

tariffs and the influence that may have on policy setting.

"Any further resurgence in inflation or inflation

expectations could delay or even halt the process of monetary

policy normalization," Greece's central bank Governor Yannis

Stournaras said on Tuesday.

Dutch policymaker Klaas Knot said the tariffs imposed would

likely have a stagflationary impact, driving up inflation while

the economy stalls.

"With everything going on now, it makes sense for the ECB to

cut by 25 basis points in April," said Nordea's Svendsen.

"If things completely blow up, there's a risk that they will

do more but I think that's a low probability event here."

Money market traders have moved to fully price in a

quarter-point interest rate cut from the ECB at its April

meeting, having only priced around an 85%

chance on Tuesday.

Germany's monetary policy-sensitive two-year yield

was down 10 bps at 1.7628%.