* Traders see lower chances of another ECB rate hike this

year

* German 2-year yields up 3 bps at 2.539% after touching

lowest since mid-April

* The 2-year Treasury premium over Germany reaches 165 bps,

near 10-month highs

(Updates yields)

By Amanda Cooper

LONDON, July 2 (Reuters) - Euro zone government bond yields

edged higher on Thursday, but remained near this week's lows, as

investors dialled down their expectations for the European

Central Bank to aggressively raise interest rates this year.

ECB President Christine Lagarde said on Wednesday the risks

to euro zone inflation and economic growth were now more broadly

balanced than a few weeks ago, given the recent fall in oil

prices, which prompted traders to cut the chances of one more

rate hike this year to around 87%, from closer to 100% a week

ago.

The ECB, in its last policy decision, said that risks to

growth were skewed to the downside, while inflation risks were

skewed to the upside.

Two-year German Schatz yields, the most sensitive

to shifts in expectations for rates and inflation, have risen

just 1.4 basis points this week, having touched their lowest

since mid-April, as the oil price has retreated. They were last

up 2 bps on the day at 2.539%.

Benchmark 10-year Bund yields were up for a

fourth day in a row, trading 4 bps higher at 2.967%.

"Our read of Lagarde's comments is that the ECB would remain

on hold if oil prices remain around current levels," Jefferies

strategist Mohit Kumar said.

WARSH STICKING TO FED INFLATION TARGET

Lagarde was speaking at the ECB's annual forum in the

Portuguese town of Sintra, where Federal Reserve Chair Kevin

Warsh said he would stick firmly to the Fed's 2% inflation

target and "disappoint" anyone who expected loose monetary

policy, despite President Donald Trump's call for interest rate

cuts.

Since Warsh took the helm at the Fed on May 22, U.S.

Treasuries have noticeably underperformed other major bond

markets, as investors rushed to factor in the possibility of

rate hikes this year.

Two-year Treasury yields have risen 5.15 bps in

that time, compared with a drop of nearly 10.5 bps in German

2-year yields, which have benefited from investors

lowering their expectations for the ECB to deliver more than one

rate hike this year.

The premium of 2-year Treasury yields over 2-year German

is now around 165 bps, close to its highest since

last September, reflecting the rising chances of Fed hikes

versus the falling chances of many more from the ECB.

The main macro event is the monthly U.S. employment report

for June later on Thursday. A Reuters poll of economists offers

a forecast for an increase of 110,000 workers on non-farm

payrolls, below May's 172,000 rise, while the unemployment rate

is expected to remain at 4.3%.

(Editing by Alex Richardson)