Euro zone bond yields slightly lower on week after ECB meeting

By Stefano Rebaudo

Feb 6 (Reuters) - Euro zone government bond yields were set to end the week slightly lower after the European Central Bank kept rates on hold, bolstering expectations of steady policy through 2026.

Asked about the currency, President Christine Lagarde said the ECB was keeping a close eye on markets but ultimately concluded that no big change has taken place in recent months.

German two-year government bond yields recorded in January their largest monthly drop since last April, driven lower by investors betting the ECB will factor in the deflationary drag from a stronger euro in its monetary policy.

The 2-year yields DE2YT=RR were down 1.5 basis points (bps) at 2.05% on Friday, and on track for a 1.5 bps weekly drop.

Money markets priced in around a 30% chance of a rate cut in September EURESTECBM6X7=ICAP, and indicated a 15% probability of a rate hike in April 2027. EURESTECBM11X12=ICAP

Germany’s 10-year government bond yield DE10YT=RR, the euro area’s benchmark, fell 2 bps to 2.82%, and was set for a weekly drop of 2 bps.

U.S. Treasury yields slipped, with the 10-year US10YT=RR down 2.5 bps at 4.19% in early London trade, after falling the day before as two economic releases pointed to a weaker than expected jobs market ahead of next week's highly anticipated payrolls report for January.

Italy’s 10-year government bond yield IT10YT=RR was down one bp to 3.46%. The gap versus Bunds was at 60 bps, after tightening to 53.50 bps in mid-January, its lowest level since August 2008.

Analysts see little chance of a further tightening in euro area yield spreads without progress on European financial integration.