March 17 (Reuters) - Euro zone government bond yields

dropped on Monday ahead of the German parliament vote on the

country's spending plans on Tuesday in a week packed with

central bank policy meetings.

Plans by chancellor-in-waiting Friedrich Merz to unleash a

massive state borrowing programme were hit by last-minute legal

challenges from the far-right Alternative for Germany, which

challenged the vote at the constitutional court.

Meanwhile, Ifo Institute cut its forecast for the euro

zone's biggest economy to 0.2% on Monday, citing subdued

consumer sentiment and companies' reluctance to invest.

Spending plan will be a "positive" for its prized triple-A

sovereign credit rating, S&P Global said on Wednesday.

Germany's 10-year government bond yields were

down 5 basis points (bps) at 2.82%. They hit 2.938% last week,

their highest level since October 2023, as expectations for more

bond supply drove yields higher.

On Wednesday, the Federal Reserve and the Bank of Japan will

announce their rate decisions, followed on Thursday by the Bank

of England, the Riksbank and the Swiss National Bank.

BofA argued that the Fed will most likely stay on hold,

"emphasizing patience over panic."

"U.S. rates may react to Fed communications with a curve

flattening, reflecting the challenges of navigating sticky

inflation and on-hold policy stance," said BofA rate strategist

Mark Cabana.

"We would encourage clients to fade any curve flattening

with the expectation that further declines in risk assets could

push the market to price more Fed cuts."

There are "no guarantees" there will not be a recession in

the U.S., although there could be an adjustment, Treasury

Secretary Scott Bessent said in an interview on Sunday.

U.S. stock index futures took a hit on Monday after

Bessent's comments.

Germany's 2-year yield, more sensitive to

European Central Bank policy rates, fell one bp to 2.18%. It hit

2.319% two weeks ago, its highest since mid-January.

U.S. tariffs and Ukraine remained in focus after U.S.

President Donald Trump said he would not create exemptions on

steel and aluminium tariffs. He also said he planned to speak to

Russian President Vladimir Putin on Tuesday and discuss ending

the war in Ukraine.

Tariffs are supposed to boost inflation and depress growth,

while a peace deal in Ukraine should be good for risky assets

and the euro area economy.

Italy's 10-year yields dropped 6.5 bps to 3.50%.

The yield gap between Italian and German bonds --

a market gauge of the risk premium investors demand to hold

Italian debt - was at 105 bps.

The spread between French and German bonds

stood at 67 bps, at the lower end of its recent range, after S&P

left the French rating unchanged but revised its outlook to

negative from stable.