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Euro zone yields fall, but less than U.S. Treasuries

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Markets weigh potential German defence spending boost

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Tariff worries keep traders on edge

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ECB expected to cut rates next week

(Updates in late European trade)

By Lucy Raitano and Greta Rosen Fondahn

LONDON, Feb 25 (Reuters) - Euro zone bond yields edged

lower on Tuesday, though not by as much as U.S. yields, while

markets weighed signs that Germany could approve a boost in

defence spending before the outgoing parliament quits, a move

likely to require more borrowing.

Traders considered a report that Germany is discussing

200 billion euros ($209.78 billion) for an emergency defence

fund as the country digests its election result.

Remarks from U.S. President Donald Trump overnight that

his planned tariffs on Canadian and Mexican imports are on track

to come into force at the start of March also kept traders on

edge.

Germany's 10-year Bund yield - a benchmark for

the wider euro area - was down one basis point (bp) at 2.457%.

Yields move inversely to prices.

Meanwhile benchmark 10-year U.S. Treasury

yields fell 9 bps to 4.306%, while

data

added to emerging concerns about U.S. economic growth.

"Bund yields are holding up ... diverging from the U.S.

This could be related to Germany's plan to fast-track defence

spending and positioning for 10-year supply tomorrow," said

Kenneth Broux, head of corporate research, FX and Rates at

Societe Generale.

The risk premium investors demand to hold U.S. debt rather

than German Bunds in turn dropped to its lowest

level since November.

Italy's 10-year yield was down 3 bps at 3.531%.

The yield gap between Italian and German government bonds

was 106.8 bps.

ECB SPEAKERS

Germany's 2-year bond yield, which is more

sensitive to European Central Bank policy rates, fell for a

fourth day. It was last down 2 bps at 2.068%.

Traders have increased their bets for ECB cuts and now

expect a further 83 bps of easing this year, compared to about

71 bps last Wednesday.

Investors on Tuesday scrutinised remarks from ECB

policymakers, ahead of the central bank's monetary policy

meeting next week, where it is widely expected to cut rates for

the fifth time in a row.

The ECB has room to cut interest rates further if inflation

eases to its 2% goal this year as it expects, ECB policymaker

Joachim Nagel said on Tuesday, adding that the outlook for

prices was "encouraging".

Meanwhile, ECB board member Isabel Schnabel said it was no

longer clear that the central bank's 2.75% deposit rate was

still holding back the economy.

Also in the mix, the German economy, Europe's largest,

shrank by 0.2% in the final quarter of 2024 compared with the

previous quarter, the statistics office reported on Tuesday,

confirming a preliminary reading.

($1 = 0.9534 euros)