Sept 2 (Reuters) - France's 30-year government bond

yields hit their highest levels in over 16 years on Tuesday,

driven by fiscal concerns, as Prime Minister François Bayrou

began talks with political parties in a bid to prevent a

government collapse.

France's far-right National Rally said on Monday it was

preparing for snap elections, anticipating that opposition

parties will bring down the minority government in a vote

scheduled for September 8.

French debt could rise further, with economists at ING

noting the government's target to lower the debt-to-GDP ratio to

117.6% by 2026 and 117.2% by 2029 compared to projected levels

of 118.3% and 125.3% without fiscal reforms.

France's 30-year government bond yield hit 4.513%,

its highest since June 2009, and was last up 5 basis points

(bps) at 4.50%.

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

French government bonds - a market gauge of the

risk premium investors demand to hold French debt - widened to

80 bps after rising up to 82 bps last week.

"European politics have come back into focus, with growing

anxiety surrounding a standoff over efforts to curb government

borrowing in France along with moves by European leaders to

underpin Ukraine's security following any peace deal," said Mark

Haefele, chief investment officer at UBS GWM.

Ultra long-dated government bonds have come under selling

pressure as markets expect Germany's investment plans, along

with likely increases in defence spending across euro area

countries, to push up debt levels.

The German 10-year bond yield, the benchmark for

the euro zone bloc, rose 3 bps to 2.78%. Yields on 30-year

German bonds hit a fresh 14-year high at 3.413%.

Spain's 30-year yields were up 4.5 bps at 4.29%,

after reaching 4.297%, its highest since November 2023.

Italy's 30-year yields rose to their highest

since April at 4.661%.

Euro zone inflation edged up a touch in August, staying close to

the European Central Bank's 2% target and likely firming up

market bets that interest rates will remain unchanged in the

near term.

The ECB should keep interest rates steady as the euro zone

economy is holding its own in the face of U.S. tariffs and

inflation may still come in higher than expected, ECB

policymaker Isabel Schnabel told Reuters.

"The direction of inflation from here is still a live debate

at the Governing Council, as also highlighted by the more

hawkish comments from Isabel Schnabel this morning," said

Michiel Tukker, rate strategist at ING.

"The ECB will have a bias towards more easing," he added,

after arguing that data are still showing close to zero growth.

Germany's two-year bond yield, which is more

sensitive to ECB rate expectations, rose 1.5 bps to 1.97%.

Markets priced in around a 70% chance of an ECB rate cut of 25

bps in June 2026 but also a depo rate at

1.905% from the current 2% at the end 2026.