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Germany's Ifo index ends four-month streak of declines

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Euro zone bank lending continues to rebound - ECB

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Moody's to review France's rating, DBRS to review Italy

(Updates at 1030 GMT)

By Medha Singh

LONDON Oct 25 (Reuters) - Euro zone government bond

yields rose on Friday as a survey showing better than expected

business sentiment in Europe's largest economy dented some of

the appetite that pushed yields lower earlier this week.

German business morale in October's Ifo Institute survey

ended a four-month streak of declines, a breather for a country

that has been battling to fend off recession.

Separately, euro zone bank lending continued to rebound last

month and a measure of money supply, sometimes an indicator of

future economic growth, expanded more than expected, ECB data

showed.

"The ECB is likely to take today's data release as

encouragement that taking their foot off the monetary brake

further will have an impact on the prospect of improving

economic activity," said ING economist Bert Colijn.

The German 10-year bond yield, the benchmark

for the region, was up 3 basis points (bps) at 2.282% after

easing from a seven-week high this week.

Latvian central bank chief Martins Kazaks

said

the ECB may need to ease policy somewhat faster than

earlier thought. That was in line with some policymakers who

have recently said inflation could soon fall below the bank's 2%

target.

However, three ECB officials tried to cool market

speculation of bigger interest rate cuts, urging the central

bank to proceed gradually after three cuts this year.

Traders are currently fully pricing in a quarter-point

cut from the ECB in December, with a 44% chance of a half-point

move, up from 20% just a week ago.

Germany's two-year bond yield, more sensitive to

rate expectations, rose 4 bps to 2.137% after hitting a

three-week low in the previous session.

Growing bets on a second U.S. presidential term for Donald

Trump have been boosting U.S. Treasury yields and the dollar.

Economists expect Trump's policies, including plans to

raise import tariffs, to stoke inflation and weigh on the

struggling European economy.

Moody's review of France's sovereign rating will be in focus

later after it warned in July that the outcome of France's

election was a negative.

Fitch this month cut France's outlook to "negative" from

"stable" and kept its rating at AA-. S&P downgraded France to

AA- in May.

Unicredit economist Tullia Bucco expected Moody's to

downgrade, but did not expect that to move French government

bonds since its rating would remain one notch higher than those

of S&P and Fitch:

"The political situation remains uncertain, keeping

foreign investors concerned about the fiscal picture in France.

We think these two factors will offset each other, keeping the

10Y OAT-Bund spread at around its current level in the near

term."

The spread between French and German

10-year yields - the premium investors demand to hold France's

bonds - was last at 72.70 bps, down from about 80 bps in late

Sept.

Italy's 10-year yield was 3 bps higher at

3.492% ahead of rating agency DBRS's scheduled review of its

sovereign debt. The gap between Italian and German yields

stood at 120.9 bps.