(Updates in late morning European trading)

By Harry Robertson

LONDON, March 27 (Reuters) - Shorter-dated euro zone

bond yields dipped on Thursday after U.S. President Donald Trump

announced a 25% tariff on imported vehicles, a move that could

dent the bloc's economy given Germany's focus on car-making.

Germany's 2-year bond yield, which is sensitive

to European Central Bank interest rate expectations, fell as

much as 5 basis points (bps) in early trading to 2.07%, its

lowest since March 4. It was last down 3 bps at 2.088%.

Traders in money markets nudged up their bets on ECB

interest rate cuts and last priced in a rate of 1.95% by the end

of the year, compared with 1.98% on Wednesday. Rates currently

stand at 2.5%.

The new levies on cars and light trucks will take effect on

April 3, the day after Trump plans to announce reciprocal

tariffs aimed at the countries responsible for the bulk of the

U.S. trade deficit.

"The announcement by Trump appears to be responsible for

this morning's bull steepening of the Bund curve," said Lyn

Graham-Taylor, senior rates strategist at Rabobank, referring to

a fall in shorter-dated German yields compared to longer-dated

ones.

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

the euro zone bloc, initially fell 4 bps but was last 1 bp lower

at 2.78%.

Italy's 10-year yield was also down 1 bp at

3.886%, and the gap between Italian and German 10-year yields

held broadly steady at 109 bps.

Economists said the German economy, which has flatlined over

the last two years, could come under more pressure.

"Imports of finished cars and vehicles for transport (into

the U.S.) amounted to $217 billion in 2024, or 6.6% of total

goods imports," said Paul Ashworth, chief North America

economist at Capital Economics.

Ashworth said 21% of those came from the European Union,

"half of which came specifically from Germany".

Nonetheless, German 10-year yields remain around 40 bps

higher for the month after a major overhaul of the country's

spending rules that should boost growth and increase borrowing

via bond markets.

The focus next week will be on the form Trump's

long-promised reciprocal tariffs take on April 2.

France's 10-year bond yield traded broadly in

line with peers, down 1 bp at 3.479%, after data showed the

public sector budget deficit widened last year but not quite as

much as the government had expected.