(Updates with afternoon trading)

By Linda Pasquini

May 7 (Reuters) -

Euro zone government bond yields dipped on Wednesday as

traders awaited the Federal Reserve's policy meeting later in

the day, its first since U.S. President Donald Trump's early

April tariff announcement rattled financial markets.

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

dropped 5 basis point to 2.48%, down from three-week

highs touched on Tuesday, extending an earlier decline in line

with moves in the U.S.

German politics was in focus a day after conservative leader

Friedrich Merz was elected chancellor by parliament in a second

round of voting following an unprecedented defeat in the first

attempt, which got his coalition government off to a wobbly

start.

Investors are closely watching Merz's policy plans. His

early March announcement of a historic change to Germany's debt

brake and a massive spending programme sent Germany's 10-year

yield up above 2.9% before it retreated in April on safe-haven

flows following Trump's tariff plans.

The focus is now shifting to how soon Germany can ramp up

spending and borrowing.

Nabil Milali, a strategist at Edmond de Rothschild Asset

Management, said there were doubts around the ability of this

coalition to put in place fiscal measures in 2025, with the

majority of the spending most likely to happen in 2026.

"And so for the bond market, in the short term, it's not a

game changer in terms of supply. It's not a game changer in

terms of growth for Germany," Milali said.

Long dated debt outperformed, and Germany's 30-year

yield was down 7 bps at 2.95%.

Also important for bond markets was Wednesday's Fed rate

decision which comes against a backdrop of concern about the

outlook for the U.S. economy given heightened trade uncertainty.

Chair Jerome Powell has also said he thinks Trump's

tariffs would be inflationary, further

complicating policy making

, and leaving them in wait and see mode until economic data

can indicate the scale of the impact on growth or inflation.

As a result, market pricing reflects expectations the Fed

keeps rates unchanged on Wednesday but cuts later this year

. Any hints about the timing of those cuts could move

bond markets in the U.S. as well as around the world.

The Bank of England, the Riksbank and Norges Bank meet on

Thursday.

Italy's 10-year yield was down 4 basis point at

3.60%, leaving the spread between it and Germany's Bund yield at

106 basis points.