Bund yields drop from near 4-week high tracking US Treasuries

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US Treasury yields drop on concerns over the US economy

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BoE keeps rates unchanged, expected to deliver a cut in December

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Markets see ECB key rate steady through early 2027

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By Stefano Rebaudo

Nov 6 (Reuters) - Euro zone benchmark Bund yields dropped from their four-week high on Thursday, taking the lead from U.S. Treasuries after the Bank of England decided to keep rates on hold.

The BoE's narrow vote and signs that Governor Andrew Bailey might soon join those seeking a rate cut increase the chances of an easing move in December.

Germany's 10-year yields were down 2 basis points (bps) at 2.65% after hitting 2.676% early in the session, the highest level since October 10.

Benchmark 10-year U.S. Treasury yields fell 6 bps to 4.1% due to concerns over a weakening U.S. labour market as well as the prospect of more economic uncertainty caused by the government shutdown in Washington and questions over the legality of President Donald Trump's tariffs.

Concerns about the German economy persisted after data showed industrial production rose less than expected in September, while the Bundesbank warned of rising risks to the country's financial stability.

"We expect that real GDP growth will accelerate from the fourth quarter onwards, moving from near stagnation towards rates of 0.2% and 0.3% quarter-on-quarter," Berenberg economist Salomon Fiedler said.

"The fiscal stimulus, which is now finally starting to ramp up, and some modest pro-growth policies should help with that."

However, market conviction about the European Central Bank rate outlook remains strong, with traders pricing the deposit facility rate to stay around 2% by early 2027.

Money markets projected in a roughly 40% chance of a 25-basis-point ECB rate cut by September 2026 from over 80% in mid-October at the height of U.S.-China trade tensions.

The ECB must keep its options open for interest rate moves at upcoming meetings, policymaker Francois Villeroy de Galhau said during a conference on Wednesday. Another ECB policymaker, Joachim Nagel, said the ECB should be vigilant on inflation, but not complacent.

Luis de Guindos, the bank's vice president, said on Thursday any inflation dip below 2% would be temporary.

China's commerce ministry on Thursday flagged fresh prospects for a trade or investment agreement with the European Union, raising the idea of negotiations for a deal similar to a landmark investment pact whose ratification was frozen in 2021. Germany's 2-year yields, more sensitive to expectations for ECB policy rate outlook, fell one bp to 2.0%.

The yield gap between safe-haven Bunds and 10-year French government bonds - a market gauge of the risk premium investors demand to hold French debt - was at 79 bps. Concerns over France's fiscal trajectory pushed the spread to around 88 bps in early October. (Reporting by Stefano Rebaudo; editing by Ros Russell and Philippa Fletcher)