German yields steady after hitting multi-week lows

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German yields take cues from elsewhere

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BofA no longer expects March rate cut

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French 10-year yield spread versus Bund at widest in two weeks

(Updated for European close)

By Stefano Rebaudo

Feb 6 (Reuters) - German government bond yields were little changed on Friday after earlier touching multi-week lows, a day after the European Central Bank kept interest rates unchanged. With Thursday's ECB meeting offering no ?reason to change the euro area rate outlook, German bonds have been taking cues from elsewhere, including general market skittishness and the Bank of England's ?dovish surprise.

Germany's 10-year government bond yield, the euro zone's benchmark, was little changed at 2.845%, after hitting 2.813%, ?its lowest since January 19. U.S. Treasury yields were also flat, with the ?10-year at 4.216%, 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. While ECB President Christine Lagarde played down the ?impact of euro/dollar moves on the bank's future choices, policymaker Martins Kazaks said a significant appreciation of the euro could prompt a monetary policy response. 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. Germany's two-year yield was down 0.5 basis points (bps) at 2.068%, after earlier falling ?to its lowest since December 3 at 2.046%.

Economists' views on the policy rate outlook remained mixed, reflecting uncertainty over the economy.

Bank of America strategists no longer expect the ECB to cut rates next month and see the central bank on hold throughout 2026, although they believe there are risks to their outlook.

"Risks are skewed toward earlier cuts if inflation undershoots persistently, as we expect," they said in a note.

Money markets ?priced ?in around a 30% chance of a rate cut in September, up from 20% on Thursday, and indicated a 0% probability of a rate hike in April 2027, down from 10%. "It may ?be argued that rising ECB confidence in the gradual delivery of public investment in defence and infrastructure, not only in Germany, continues to tilt the balance of probability towards the next policy move being a rate hike," said Arnaud Mar?s, chief European economist at Citi about Lagarde's speech.

Italy's 10-year government bond yield was down 0.5 bps at 3.472%. The gap versus Bunds stood at 61 bps. It reached 53.50 in mid-January, its narrowest level since August 2008.

The French 10-year yield ?spread widened 62 bps, its highest since January 23, and was last at 60 bps. It hit 55.15 bps on January 28, its tightest since June 2024. Analysts and investors argued that spreads had run their course in terms of tightening, barring progress on ?European financial integration. (Reporting by Stefano Rebaudo, additional reporting by Samuel Indyk; Editing by William Maclean, Philippa Fletcher and Emelia Sithole-Matarise)