Bund yields hit fresh two-month low ahead of US data

By Stefano Rebaudo

Feb 13 (Reuters) - Euro area benchmark Bund yields hit a fresh two-month low on Friday and were set for their biggest weekly drop since March ahead of U.S. economic data due later in the session.

Markets have been tracking U.S. Treasuries, but the European Central Bank is expected to keep policy on hold this year.

Germany’s 10-year government bond yield DE10YT=RR, the euro area’s benchmark, dropped one basis point to 2.763%, its lowest since December 4, on track for a 9 bps weekly fall.

U.S. Treasury yields edged up in early London trading, with benchmark 10-year US10YT=RR paper up half a basis point at 4.11% after falling the previous day on labour market data.

Money markets priced in a 30% chance of an ECB cut to interest rates by December. EURESTECBM7X8=ICAP

Germany’s two-year yield, more sensitive to expectations for policy rates, was down one basis point at 2.02%.

Italy’s 10-year government bond yields IT10YT=RR fell 0.5 basis points (bps) to 3.39%. The gap versus Bunds was at 60 bps after falling to 53.50 bps in mid-January, its lowest since August 2008.

Analysts mentioned progress on European financial integration as a key factor for further tightening in euro area yield spreads.