* ECB seen paving way this week for more easing
* Italy, Spain yields hold steady
* Greek yields slip on report of potential new bailout
By Emelia Sithole-Matarise
LONDON, Feb 3 (Reuters) - German 10-year bond yields hovered around six-month lows on Monday on increased expectation that low inflation will lead the European Central Bank to ease policy further in the coming months.
While final reports on euro zone manufacturing activity largely confirmed a recovery in the bloc’s major economies, investors’ focus was on the next ECB policy move after data last week showed inflation fell to 0.7 percent in January, well below the bank’s target of nearly 2 percent.
This drove euro zone government bond yields, except Greek ones, sharply down on increased speculation that the ECB would cut interest rates further later this year.
Many in the market expect the bank to hold fire at its meeting on Thursday but signal its readiness to take accommodative measures in coming months.
“The market is positioned for a dovish message from the ECB on Thursday but we think it’s a bit early for them to move on Thursday given the comments we’ve heard from some members of the governing council.”
German 10-year yields were slightly up at 1.57 percent , near a low of 1.555 percent hit on Friday. The rally in German Bunds also cooled as some stability returned to emerging markets where activity was subdued with China on holiday to mark the Lunar Year.
“Data releases should confirm that the economic outlook is continuing to brighten across the European Union and the United States, but this will likely not be enough to lead to a bond-unfriendly move on core curves,” UniCredit strategists said in a note.
Elsewhere in the market, Greek yields fell 6 basis points to 8.64 percent as some stability returned to emerging markets and after a press report that Germany was preparing the ground for a third bailout for Athens ahead of European elections in May.
Greece - whose debt markets are heavily influenced by investors exposed mainly to emerging markets - saw its 10-year bond yields hit their highest this year on the sell-off in emerging markets.
Spanish and Italian yields were stable at 3.68 and 3.78 percent respectively.