(Updates prices to Europe afternoon)

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Bond yields tick higher after upbeat US economic data

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Geopolitical risks fail to move the bond market

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Hopes for fiscal stimulus to boost German economy fading

By Stefano Rebaudo

Sept 25 (Reuters) - Euro zone government bond yields

nudged higher on Thursday, tracking U.S. Treasuries after upbeat

U.S. economic data, but rate volatility continued to ease with

the European Central Bank expected to remain on hold until the

end of 2026

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

zone, was 2.5 bps higher at 2.764%, after falling earlier in the

session.

The 10-year U.S. Treasury yield rose nearly 5 bps to

4.1950%, its highest in three weeks, after data showed the U.S.

economy

grew faster

than previously estimated in the second quarter, prompting

traders to trim their expectations for a rate cut by the Federal

Reserve next month.

Investors have recently strengthened their expectations for

the European Central Bank to keep rates higher for longer, with

money markets pricing in less than a 35% chance of a 25 bp rate

cut by June.

Germany's 2-year yield, more sensitive to ECB policy

expectations, rose 2 bps to 2.044%, the highest since April,

while the U.S. equivalent was last up nearly 6 bps at

3.657%.

Investors are focusing on the U.S. rate outlook and continue

to show limited sensitivity to geopolitical developments,

analysts said, even as Russian incursions into NATO airspace

grow bolder and NATO's response becomes increasingly tense.

The gap between yields on safe-haven German Bunds and 10-year

French government bonds - a market gauge of the

risk premium investors demand to hold French debt - was slightly

wider at 82.8 bps. French OAT yields were up 3 bps

at 3.603%.

French unions will hold another day of protests on October 2 to

put pressure on new Prime Minister Sebastien Lecornu over their

demands to scrap a fiscal austerity programme.

"The current situation is spawning tension between debt and

economic-growth concerns, especially at the long end (of the

curve)," said Sebastian Fellechner, analyst at DZ Bank,

referring to French political risks and German economic

expectations, and this "should keep the Bund yield in check for

now".

German business morale unexpectedly declined in September

as the economic outlook remained weak although consumer

sentiment is set to rise slightly heading into October, while

remaining in negative territory.

"Gone seems to be the hope that the new government and

fiscal stimulus would finally lift the economy out of its

endless stagnation," said Carsten Brzeski, global head of macro

at ING.

Italy's 10-year yield rose 4.4 bps to 3.632%. The

yield spread over Bunds widened as far as 87.33

bps, its highest since September 4. It had dropped below 80 bps,

the lowest since 2010, in mid-August.

The Swiss National Bank held its key interest rate at zero on

Thursday, the lowest among major central banks.