Euro zone yields jump, markets scale back bets on ECB rate cuts as Trump pauses tariffs

April 10 (Reuters) - Euro zone government bond yields jumped, spreads tightened, and markets scaled back their bets on European Central Bank rate cuts after the U.S. administration said it would temporarily lower U.S. tariffs to bring countries to the bargaining table.

U.S. President Donald Trump's move eased immediate concerns about a sharp slowdown of the global economy and a recession in the United States.

Trump kept the pressure on China, saying he would raise the tariff on Chinese imports to 125% from the 104% level that took effect at midnight.

Global shares surged, but the sharp overnight rally in U.S. stocks and the dollar lost steam as a trade war between the United States and China ratcheted up.

Germany's 2-year yield DE2YT=RR, more sensitive to expectations for ECB policy rates, rose 17 bps to 1.89% and was set for its biggest daily rise since March 5, when German yields jumped as German parties reached an agreement for a massive ramp-up in fiscal spending.

Money markets priced in an ECB deposit facility rate at 1.78% in December, up from 1.65% on Wednesday and 1.9% last week, shortly before Trump announced U.S. tariffs. They also discounted an around 90% chance of a rate cut in April from fully pricing it the day before.

Analysts argued that although the decision from the U.S. administration is risk-positive in the near term, it could extend uncertainty for months, impacting firms' investment decisions and economic growth.

"The risks remain huge," said Holger Schmieding, chief economist at Berenberg, mentioning "the escalating trade war between the U.S. and China."

"As long as the outcome remains open, uncertainty will reign supreme. Not knowing the tariffs they may face in the U.S., companies will delay decisions about where to invest," he added.

Germany's 10-year yield DE10YT=RR, the euro area's benchmark, rose 11 bps to 2.69%.

The yield spread between Italian and German 10-year bond yields DE10IT10=RR -- a market gauge of the premium investors demand to invest in Italian government bonds -- dropped to 116 bps from around 130 bps the day before.

Italian bonds outperformed their German counterparts, which had been major beneficiaries of the investor push out of U.S. assets in the past few days.

"The temporary tariff reduction is a near-term support for risk assets, especially Bono/BTP auctions this week, but any (yield spread) tightening might be short-lived as uncertainty lingers," said Aman Bansal, European rate strategist at Citi.