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Short-dated euro zone bond yields drop

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Investors react to possible Trump tariffs

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Traders nudge up bets on ECB rate cuts

(Updates at 1045 GMT)

By Harry Robertson

LONDON, Nov 6 (Reuters) - Euro zone bond yields fell on

Wednesday as investors reacted to Donald Trump's victory in the

U.S. presidential election, which could pave the way for higher

tariffs that might hurt Europe's economy and lead to deeper

interest rate cuts.

The German 2-year yield, which is sensitive to

European Central Bank interest rate expectations, dropped 11

basis points (bps) to 2.2%. Yields move inversely to prices.

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

euro zone, was down 4 bps at 2.389%.

Former Republican President Donald Trump was re-elected on

Wednesday morning at around 1030 GMT (1130 CET), defeating

Democrat Kamala Harris and capping a stunning political comeback

four years after losing power.

Trump's signature economic campaign promises were to put up

tariffs on imports from around the world, including Europe and

China, and to slash taxes.

"Given Trump's key elements of his agenda - tariffs on China

and the rest of the world - the market is just thinking this

would obviously have an impact on China, and Europe is a bit

more sensitive to China," said Emmanouil Karimalis, macro rates

strategist at UBS.

"That would probably have an impact on growth, so European

rates (bonds) are rallying."

Traders on Wednesday nudged up their bets on ECB rate cuts

next year, LSEG data showed. They last expected euro zone

borrowing costs to fall to around 1.95% by November 2025, down

from around 2.1% on Tuesday.

"The fact that European rates have reacted sharply might be

a little bit overdone in my view because we don't expect the ECB

to shift their expectations quickly," Karimalis said.

U.S. bond yields rose sharply on Wednesday as investors bet

Trump's policies of tax cuts and tariffs would drive up

borrowing and domestic inflation, lessening the room for rate

cuts from the U.S. Federal Reserve.

The U.S. 10-year Treasury yield was last up 15

bps at 4.437%, around its highest since early July.

Yet European yields dipped as markets positioned for a

divergence between the U.S. and euro zone economies.

"Trump winning means tariffs which will adversely affect

growth in Europe," said Andrzej Szczepaniak, vice president of

European economics at investment bank Nomura.

"The European Commission is expected to retaliate

like-for-like, which could mean higher inflation in the euro

area - or... firms could be forced to absorb these higher costs,

which in turn may result in some firms shuttering and

unemployment rising, thus weighing more heavily on growth."

France's 2-year bond yield was last down 10 bps,

while Italy's 2-year bond yield fell 9 bps. Their

respective 10-year yields were down 3 bps each

.