* Trump adviser resignation increases trade war threat
* ECB may rethink policy as tariff threat looms
* Euro zone yields lower 2-5 bps across the board
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds graphic, updates prices)
By Abhinav Ramnarayan
LONDON, March 7 (Reuters) - Euro zone government bond yields dropped on Wednesday on speculation 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.
U.S. President Donald Trump’s top economic adviser, Gary Cohn, resigned on Tuesday in a move that could ramp up protectionist measures which risk igniting a global trade war.
This fuelled demand for safe-haven government bonds, and U.S. Treasury yields dipped overnight.
In Europe, demand for government bonds stepped up on Wednesday, the day before an ECB meeting at which policymakers are expected to provide more detail on when the central bank will wind up its massive bond buying scheme.
But analysts said the message could be complicated by events in the United States. “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 increases the chance of a more dovish message from the ECB after Thursday’s meeting.
As a consequence, most euro zone government bond yields were 2-5 basis points lower. The yield on Germany’s 10-year government bond, the benchmark for the region, fell 2 basis points to 0.65 percent.
Lower-rated southern European debt - seen as more dependent on loose ECB policy - outperformed, with yields falling 4-8 basis points. Portuguese 10-year yields dropped to a one-month low of 1.84 percent.
The focus will stay with the United States later on Wednesday, with private employment data from the ADP Research Institute due to be released at 1315 GMT.
The U.S. Federal Reserve’s Lael Brainard said that she has greater confidence that gradual interest rate increases are needed.
Meanwhile, the Italy-Germany 10-year yield spread tightened further to 139 bps and was approaching pre-election levels on Tuesday, as investors appeared to put last weekend’s inconclusive vote behind them.
Former prime minister Silvio Berlusconi said in a newspaper interview on Wednesday he will support the leader of the eurosceptic League party in attempts to form a government.
Yet the effect on spreads and on the euro was minimal; the common currency was higher at $1.2415.
“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 Catherine Evans and David Stamp
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