Pre-ECB euro zone yields dip on U.S. tariffs threat

By Abhinav Ramnarayan

LONDON (Reuters) - Euro zone government bond yields fell on Wednesday on concerns that planned U.S. import tariffs including on goods from Europe could impede the European Central Bank's plan to withdraw post-crisis monetary stimulus.

Donald Trump's top economic adviser Gary Cohn, who had told the U.S. president that markets would slump on a tariffs threat, resigned on Tuesday in a move that could ramp up protectionist measures that risk igniting a global trade war.

This fuelled demand for safe-haven government bonds, and U.S. Treasury yields extended overnight falls .

In Europe, demand for government bonds also picked up, a day before a meeting at which policymakers are expected to provide more detail on when the ECB will wind up its massive bond buying scheme.

Analysts said the message could be complicated by U.S. events.

"The fear in the market is that a global trade war could influence economic growth in Europe, and if growth is lower there is more danger of a recession and the ECB might be forced to be slower in reducing accommodation," said DZ Bank analyst Pascal Segesser.

Commerzbank analysts also flagged this possibility in a note, saying Cohn's resignation increased the chance of a more dovish message from the ECB.

Most euro zone government bond yields fell 2-5 basis points, though the yield on Germany's 10-year government bond, the benchmark for the region, rose off session lows of 0.647 percent to trade at 0.65 percent by 1700 GMT - more or less flat on the day.

Lower-rated southern European debt - seen as more dependent on loose ECB policy - outperformed, with yields falling 3-7 basis points. Portuguese 10-year yields fell to a more than one-month low of 1.837 percent, before inching up to 1.874 percent.

Data showing U.S. private-sector jobs increased by 235,000 in February briefly put some upward pressure on yields, coming before Friday's closely-watched non-farm payrolls report.

The U.S. Federal Reserve's Lael Brainard said she had greater confidence that gradual interest rate increases were needed.

BREATHING ROOM

The Italy-Germany 10-year yield spread tightened further to 140 bps, having narrowed to pre-election levels on Tuesday, as investors appeared to put last weekend's inconclusive vote behind them.

The effect on spreads and on a flat euro was minimal after former prime minister Silvio Berlusconi said in a newspaper interview he would support the leader of the eurosceptic League party in attempts to form a government.

"Spreads more broadly may have some more breathing room as the actual government formation discussions in Italy do not look set to kick off for real until later this month when parliament convenes for the first time," ING strategists said in a note.

(Reporting by Abhinav Ramnarayan; Editing by David Stamp and John Stonestreet)