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, ?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 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.

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 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.

(reporting by Stefano Rebaudo Editing ?by David Goodman)