*

Markets still expect US tariffs on EU

*

ECB could lower rates to boost growth

*

Some analysts expect Fed will not ease policy this year

By Stefano Rebaudo

Feb 7 (Reuters) - Euro zone government bond yields rose

on Friday after the release of U.S. economic data, but headed

for the second straight weekly fall over concerns potential U.S.

tariffs could deliver a deflationary shock to the European

economy.

U.S. data showed January job growth slowed more than

expected, following strong gains in the previous two months.

However, the unemployment rate was steady at 4%, while hourly

earnings showed significant increases.

Germany's 10-year bond yield, the benchmark for

the euro zone bloc, was up 2.5 basis points (bps) to 2.38%. It

was set to end the week 6 bps lower after a fall of 8.5 bps the

week before on weak economic data.

While markets price in 38 bps of Fed cuts in 2025,

which implies one 25 bps move and a 52% chance of a second cut,

some analysts believe the Fed will not ease policy this year.

"With economic growth above trend and (U.S. President

Donald) Trump policies adding to inflation risks, we see no

reason for the Fed to cut rates further," said Atakan Bakiskan,

U.S. economist at Berenberg.

Markets still fear Trump will impose import duties against

the European Union, and analysts have said the demand shock

facing euro zone exporters would be likely more significant than

the inflationary effect of potential EU retaliatory tariffs.

Money markets priced in an ECB deposit facility rate at 1.9%

in December from 1.9% before U.S. data. It

was at 1.95% late last week and dropped to 1.85% after Trump

announced tariffs against China, Canada and Mexico.

The euro area neutral level for the deposit rate, which

neither stimulates nor restricts growth, is seen at between

1.75% and 2.25%, the ECB said earlier in the session.

The ECB should stand ready to ease borrowing costs to a

level lower than neutral to boost growth, ECB policymakers Olli

Rehn and Mario Centeno said this week.

German two-year yields, more sensitive to

European Central Bank rate expectations, rose 2 bps to 2.07%.

The yield spread between OATs and Bunds - a

market gauge of the risk premium investors demand to hold French

debt - was at 71 bps, after the French Senate on Thursday

approved the 2025 budget.

"We are at the bottom of the range of the past six months,

so if there's volatility, the spread could widen," said Eliezer

Ben Zimra, fixed income fund manager at Carmignac.

"Even if we have more government stability, we don't have

any structural reform to reduce debt," he added, flagging that

the yield gap could fluctuate between 70 and 100 bps.

The yield gap hit 69.60 bps on Wednesday, its tightest level

since October 31. It widened to around 90 bps, its highest since

2012, in mid-January and end-November amid fears that France

would be unable to cut its growing budget deficit.

Italy's 10-year yield was 4 bps higher at 3.48%,

and the gap between Italian and German yields

stood at 107.5 bps.