(Updates to Europe morning, adds comment)

Sept 24 (Reuters) - Euro zone bond yields were modestly

lower on Wednesday after data showed German business sentiment

unexpectedly declined in September, while U.S. bond yields

drifted lower too, as investors pondered the future outlook for

policy rates.

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

the euro zone, was down nearly 2 basis points at 2.733%.

Companies in Germany were less satisfied with their current

business and expectations also darkened noticeably with Ifo

institute's business climate index easing to 87.7 in September

from a revised 88.9 in August, data released on Wednesday

showed.

Other regional bond yields, such as those for France and

Italy, were trading in line with German debt, with yields on

longer-tenor debt drifting lower as well. Germany's 30-year bond

yield dipped about 2 bps to 3.327%.

U.S. 10-year and 30-year Treasury yields

, meanwhile, dipped to 4.102% and 4.714%,

respectively.

European defence stocks rose on Wednesday after U.S.

President Donald Trump, in a rhetorical shift, said he believed

Ukraine could retake all its land occupied by Russia, but bond

and currency markets appeared to largely shrug at the remarks.

Markets have grown accustomed to fading risks emanating from

areas like geopolitics and trade tariffs and instead seem to be

focused on the policy easing the Fed is expected to deliver,

said Chris Scicluna, head of economic research at Daiwa Capital

Markets.

While softness in the German business survey data

contributed to a dip in yields on the day, expectations of heavy

sovereign debt issuance going forward is likely to support a

drift higher in long-tenor yields, Scicluna said.

Analysts at Goldman Sachs pointed out in a note that

volatility of longer-maturity euro area government debt,

especially the 30-year point, remains somewhat elevated, likely

reflecting the uncertainty in global longer-dated debt, as well

as the timing and impact of Dutch pension reform.

The focus now is on regional debt auctions and the release

of U.S. personal consumption expenditure price data on Friday.

Italy is scheduled to sell 5-year and 10-year bonds worth up to

8.75 billion euros ($10.32 billion) later this week.

Meanwhile, investors will parse the U.S. inflation data for

cues on the future path of the Fed's policy rates. In remarks on

Tuesday, Fed Chair Jerome Powell said the central bank needed to

continue balancing the competing risks of high inflation and a

weakening job market.

Money markets are currently pricing in a 94% chance of a 25

basis point rate cut by the Fed next month, per CME's FedWatch

tool.

($1 = 0.8482 euros)

(Reporting by Jaspreet Kalra. Editing by Amanda Cooper, Mark

Potter and Ros Russell)