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Tech selloff pushes bond yields lower in morning session

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Yields rise again as stock angst eases, but remain down

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ECB expected to cut rates this week, Fed to hold

(Updates in late European trading)

By Greta Rosen Fondahn

Jan 27 (Reuters) - Euro zone bond yields fell on Monday

as investors rushed to the safety of government bonds amid a

sell-off in tech stocks, as a surge in popularity of Chinese

discount artificial intelligence model DeepSeek shook markets.

Germany's 10-year bond yield fell 8 basis points

(bps) to as low as 2.466% just after midday, as U.S. tech stock

futures tumbled more than 4%.

The benchmark euro zone yield later rose again as the tech

sell-off eased somewhat - with the U.S. Nasdaq down 2.6%

in early trading - and last stood 3 bps lower at 2.516%. Yields

move inversely to prices.

"Europe is taking its cue from the U.S.," said Richard

McGuire, head of rates strategy at Rabobank.

"Given the read-across here is that AI firms may be able to

do more with less, this news challenges the notion that,

whatever one believes about the future impact of AI, the massive

processing power required by these companies is bullish for chip

producers such as Nvidia."

U.S. 10-year Treasury yields fell as much as 12

bps on Monday and were last down 7 bps at 4.551%. Markets

increased bets on future U.S. interest rate cuts and last priced

in 49 bps of reductions in 2025.

Startup DeepSeek has rolled out a free assistant it says

uses lower-cost chips and less data, seemingly challenging a

widespread bet in financial markets that AI will drive demand

along a supply chain from chipmakers to data centres.

Speculation around U.S. tariff plans also continued while

investors waited for a string of central bank meetings this

week.

Markets broadly expect the ECB to cut rates by 25 bps on

Thursday, and investors will listen for clues about potential

further reductions. Traders are pricing in about 93 bps in ECB

cuts for 2025.

Germany's two-year bond yield, which is sensitive

to ECB rate expectations, was down 3 bps at 2.26%.

On Wednesday, the U.S. Federal Reserve is expected to hold

rates steady.

"I think there's going to be more focus on what tariff

headlines will be," said Danske Bank chief analyst Piet Haines

Christiansen.

The U.S. and Colombia pulled back from the brink of a trade

war on Sunday after the South American nation eventually agreed

to accept military aircraft carrying deported migrants.

Italy's 10-year yield was 2 bps​ lower at

3.643%, and the gap between Italian and German yields

widened to 112 bps.

In the euro zone, a survey on Monday showed German business

morale unexpectedly improved in January.

But ING analysts noted Europe's largest economy remained

stuck in a downturn.

"The slight increase in Germany's most prominent leading

indicator does not yet signal an imminent economic rebound,"

said ING's Carsten Brzeski.