(Recasts following Trump's comments on tariffs, adds

background)

By Stefano Rebaudo

May 23 (Reuters) - Euro area government bond yields fell

sharply and traders boosted bets on European Central Bank rate

cuts on Friday after U.S. President Donald Trump said he was

recommending a 50% tariff on goods from the European Union

starting on June 1.

Trump cranked up his trade threats, targeting both

smartphone giant Apple ( AAPL ) along with imports from the EU.

Germany's 10-year bond yield, the euro area's

benchmark, was last down 7.5 basis points (bps) at 2.54%, and on

track for the first weekly drop in over a month.

Money markets priced in the ECB deposit facility rate to be

at 1.60% in December from 1.72% before

Trump's remarks. They also indicated a 90% chance of an ECB rate

cut in June. The deposit rate is currently at 2.25%.

Euro zone government bond yields had been rising recently,

tracking moves in U.S. Treasuries as fiscal concerns dominated

market sentiment.

The Republican-controlled U.S. House of Representatives

passed a sweeping tax and spending bill on Thursday that could

saddle the country with trillions of dollars more in debt.

U.S. Treasury yields fell on Friday - with the 10-year

down 8 bps at 4.46% - after dropping on Thursday, as

the recent selloff drew buyers at more attractive levels.

Data released early on Friday showed an upbeat picture about

the euro area economy.

The German economy grew significantly more in the first

quarter than previously estimated.

Meanwhile, negotiated wage growth in the euro zone slowed to

2.4% in the first quarter of 2025, data from the ECB showed on

Friday.

"The gap between negotiated wages and the compensation per

employee is a good proxy of labour market tightness and has been

narrowing over the past year," said Citi economist Giada Giani.

"This confirms that remaining strength in pay growth is

mostly explained by the catching-up to higher past inflation

rather than reflecting current supply-demand imbalances in the

labour market," she added.

German 2-year yields, more sensitive to ECB

policy rates, were down 8.5 bps at 1.75%.

Focus is also on Moody's and Scope's reviews of Italy's

credit rating late on Friday, following an upgrade by S&P last

month, and a positive outlook by Fitch.

Italy's 10-year yield fell 5.5 bps to 3.61%. The

spread between Italian and German yields - a market gauge of the

risk premium investors demand to hold Italian debt - widened to

103 bps.

(Reporting by Stefano Rebaudo, editing by Tomasz Janowski and

Emelia Sithole-Matarise)