Euro area yields set for weekly rise after US data, Ukraine in focus

Updates in late European trade

By Stefano Rebaudo

Feb 14 (Reuters) - Euro zone government bond yields were little changed on Friday but set to end the week higher following U.S. economic data and Federal Reserve Chair Jerome Powell's remarks that the central bank was in no rush to cut interest rates.

Economists noted that Thursday's U.S. producer price index painted a less alarming picture for underlying inflation dynamics than Tuesday's consumer price data.

On Friday, U.S. data showed that retail sales in the world's largest economy dropped in January, after which U.S. Treasury yields fell back.

Germany's 10-year bond yield DE10YT=RR, the euro area's benchmark, held steady at 2.422%.

Euro zone data showed the economy is broadly stagnant.

Markets are monitoring prospects for a peace deal in Ukraine, which could boost the euro area's economy, and taking comfort that U.S. reciprocal tariffs were not immediately imposed.

U.S. Vice President JD Vance warned Russia that Washington could hit Moscow with sanctions if it does not agree to a good peace deal for Ukraine, while urging Europe to spend more on defence as he arrived for the Munich Security Conference.

Germany's snap national elections on February 23 are also in investor focus as a possible reform of its self-imposed borrowing limit, known as the "debt brake", could increase German bond supply.

"An election outcome under which debt brake reform appears plausible would likely fuel cheapening pressure of German bond yields versus swaps, with markets pricing in higher German budget deficits and larger German bond issuance volumes down the line," Rohan Khanna, head of euro rates strategy at Barclays, said in a research note.

"We think this type of price action would likely be most notable in a scenario where a CDU-SPD coalition appears to have won a two-thirds majority in the parliament, and to a lesser extent if a CDU-SPD-Green coalition appears to be clearing the same hurdle," he said.

However, such an outcome was highly unlikely based on current polls, he added. The most likely coalition, involving Conservatives and Social Democrats, could struggle to agree on deep reforms.

The gap between the interest rate swap and Bund yields DE10IRS10Y=RR was at -2.5 basis points after recently hitting -8 bps.

Germany's 2-year yield DE2YT=RR, more sensitive to European Central Bank policy rates, rose 1.5 bps to 2.1%.

Italy's 10-year yield IT10YT=RR was up 1.5 bps at 3.52%. The yield gap between Italian and German yields DE10IT10=RR was at 108.7 bps.

Yield spreads between peripheral and core euro zone bonds have tightened as appetite for riskier assets was high, driving global stock markets to record peaks this week.