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US data prompts bets on Fed rate cuts, pressuring Treasury

yields

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ECB's Kazaks warns of high uncertainty affecting rate

policy

outlook

(Updates to European morning)

By Medha Singh

May 16 (Reuters) - Euro zone government bond yields

dropped on Friday, backing further away from multi-week highs

hit earlier this week as U.S. economic data disappointed and

risk appetite sparked by a de-escalation in the Sino-U.S. trade

war faded.

German 10-year bond yields, the benchmark for

the euro zone bloc, fell 4.6 basis points to 2.579%, but were

still headed for their fourth consecutive weekly rise,

reflecting the investor push away from debt. Bond yields move

inversely to prices.

The United States announced trade deals with Britain and

China this month, allaying fears of a recession caused by the

trade war, which lessened demand for safe-haven assets that sent

U.S. and euro zone yields to one-month highs this week.

However, a raft of soft data on Thursday indicated the

world's largest economy slowed last month, which prompted

traders to up their bets on interest rate cuts from the Federal

Reserve and sent U.S. 10-year Treasury yields 7

bps lower.

The yield on the U.S. 10-year Treasury bond was down 4.6 bps

at 4.41% in Europe on Friday.

James Ringer, fund manager at Schroders ( SHNWF ), said many had

anticipated that the market could shrug off weakness in April

data given some resolution in trade tensions and the likelihood

that much of the data had been gathered during the peak of

market panic. However, Thursday's reaction showed the market was

not willing to look past the data.

"How the U.S. data evolves over the next few weeks, in

particular the hard data - jobless claims at the back end of the

month, payrolls - that's going to be the most important," Ringer

added.

Lately, money markets have priced in fewer interest rate

cuts from the European Central Bank, expecting deposit facility

rate to be at 1.72% by December compared with 1.65% expected on

May 9 and 1.55% after the ECB suggested in mid-April it would

cut rates in response to a possible tariff-induced economic

slowdown.

ECB policymaker Martins Kazaks said on Friday rates may be

close to bottoming out, but uncertainty was high and the

environment was prone to sudden changes that could also alter

the policy outlook.

Germany's two-year bond yield, which is more

sensitive to European Central Bank rate expectations, was down

2.7 bps at 1.856%.

"It's a lot less about politics at the moment and a lot more

on the fundamentals on growth, on inflation and what that means

for the ECB," Ringer said.

Italy's 10-year yield fell 4.3 bps at 3.596%,

and the gap between Italian and German bunds

narrowed slightly to 100.5 bps.