Nov 12 (Reuters) - Euro zone yields fell on Tuesday

after data showed German investor morale declined in November,

reflecting concerns that U.S. President-elect Donald Trump's

proposed policies could hit the European economy.

The uncertainty unleashed by Trump's election victory and

the collapse of the German government overshadowed expectations.

However, investors were not willing to drive yields down

significantly before the opening of the U.S. market, which was

closed on Monday.

Short-dated U.S. Treasury yields jumped to a fresh

3-1/2-month high on the so-called Trump trade.

Germany's 10-year government bond yield, the

benchmark for the euro area, dropped to 2.299%, its lowest since

Oct. 30, and was last down 2 basis points (bps) to 2.30%. It was

roughly unchanged before the data.

Money markets nudged up their bets on future European

Central Bank rate cuts. They priced in a depo rate at 2% in July

, from 1.93% before the data. The depo rate

is currently 3.5%.

Protectionist policies from the incoming U.S. administration

will hamper global growth, and Europe must be better prepared

than in 2018 when Trump's previous administration took similar

steps, European Central Bank policymakers warned.

Germany's 2-year yield, more sensitive to

expectations for policy rates, fell to 2.111%, its lowest since

Oct. 28, and was last down 1.5 bps at 2.12%.

The political crisis in Germany is in the spotlight, with

investors aware it will take time to understand whether a new

government will boost public spending to stimulate the economy.

Germany's Social Democrats, Greens and conservatives have

proposed Feb. 23 as a date for a new election.

The conservative Friedrich Merz, who is in poll position to

become chancellor, has set two prerequisites for discussing a

reform for the so-called debt brake: having conditions for the

money to be invested in pro-growth programmes and social

welfare.

"Absent an even larger economic shock there are still

reasons to be somewhat skeptical about a large easing in German

fiscal policy under a new government," said Matteo Mamprin,

rates strategist at JP Morgan, who sees the recent "term premium

(on Bund swap) repricing quite excessive."

Germany's 10-year asset swap spread (ASW)

was at -2.5 bps after hitting -7.45 bps last week, its lowest

since at least 2003, also on concerns about a potential increase

of Bund supply.

Swap spreads, the difference between the 10-year government

bond yield and the 10-year swap rate, reflect risk appetite in

the broader financial market while being a gauge of an issuer's

credit quality.

Swap spreads on German bonds have been tightening since

March 2023 - with the 10-year at around 80 bps - when the ECB

started to unwind its portfolio of assets, increasing the supply

of government bonds in the market.

Italy's 10-year government bond yield, the

benchmark for the euro area's periphery, was down 1.5 bps at

3.58%, after hitting 3.573%, its lowest since Oct. 30.