Sept 25 (Reuters) - Euro zone government bond yields

edged up on Thursday as rates volatility continues to ease with

the European Central Bank expected to remain on hold until the

end of 2026.

Germany's 10-year government bond yield, the

benchmark for the bloc, rose 1 basis point to 2.76% after

dropping 0.5 bp the day before.

Markets have recently strengthened their expectations for

the ECB to keep policy rates higher for longer.

Traders priced in a 40% chance of a rate cut by July

which would bring the depo rate to 1.75%.

The key rate is seen at 1.97% in December 2026.

Consumer sentiment in Germany is set to improve slightly

heading into October, while remaining in negative territory.

U.S. Treasuries were roughly unchanged in early London trade

with the 10-year yields flat at 4.15%.

Germany's 2-year yields, more sensitive to

expectations for ECB policy rates, were flat at 2.02%.

The yield gap between safe-haven Bunds and 10-year French

government bonds - a market gauge of the risk

premium investors demand to hold French debt - was stable around

82 bps. France's OAT yields rose one bp to 3.58%.

French unions will hold another day of strike and protests

on October 2 to put pressure on Prime Minister Sebastien Lecornu

over their demands to scrap his predecessor's austerity

programme.

Italy's 10-year government bond yields were up

1.5 bps at 3.61%. The yield gap versus safe-haven Bunds

was at 84.5 bps. It dropped below 80 bps, its

lowest since 2010, in mid-August.