May 26 (Reuters) - Euro zone government bond yields

edged up on Monday as the U.S. backed away from its threat to

slap 50% tariffs on European imports, soothing fears of a sharp

economic slowdown.

U.S. President Donald Trump agreed on Sunday to extend the

deadline until July 9 for talks between Washington and the

27-nation bloc to produce a deal.

Germany's 10-year yield rose 3 basis points

(bps) to 2.60%, after dropping 6.5 bps on Friday.

Trading volumes on Monday are expected to be thin given that

markets in the United States and Britain are closed due to

public holidays.

Money markets priced in the European Central Bank deposit

facility rate at 1.70% in December, up from

1.67% late on Friday. It reached 1.55% after the ECB suggested

in mid-April it could cut rates in response to a possible

tariff-induced economic slowdown.

Money markets also indicated more than a 95% chance of an

ECB rate cut in June and less than a 20% chance of a second

easing move in July.

German 2-year government bond yields, more

sensitive to ECB policy rates, were up 4 bps at 1.80% after

falling 7 bps on Friday.

Italy's 10-year yield rose 1 bp to 3.82%, after

credit rating agency Moody's on Friday upgraded its outlook on

Italy to "positive".

The spread between Italian and German yields - a market

gauge of the risk premium investors demand to hold Italian debt

- dropped 2.5 bps to 96.50. It hit 90.90 bps last

week, its lowest since February 2021.