June 25 (Reuters) - German government bond yields edged

lower on Wednesday, following a rise the day before, after

market focus shifted to the German cabinet's approval of a draft

budget with record investments.

Meanwhile, NATO leaders gathered in The Hague with European

allies hoping a pledge to hike defence spending will prompt U.S.

President Donald Trump to dispel doubts about his commitment to

the alliance.

German 10-year government bond yields, which

serve as the benchmark for the wider euro zone, fell one basis

point (bp) to 2.53%.

Yields on 30-year German bonds were down 0.5 bps

after climbing 5 bps on Tuesday.

Closely watched oil prices held near multi-week lows on the

prospect that crude flows would not be disrupted, after a

ceasefire between Iran and Israel.

Analysts argued that a spike in energy prices could have

disrupted the current narrative of there being more

disinflationary than inflationary pressures in the euro area and

the U.S., leading markets to scale back their bets on central

bank rate cuts.

Money markets priced in a European Central Bank deposit

facility rate at 1.77% in December from

around 1.75% before the Israeli attack against Iran on June 13.

A key market gauge of euro area long-term inflation

expectations was at 2.12% on Tuesday from around

2.08% on June 12.

Italy's 10-year yields dropped 1.5 bps to 3.47%. The Italian

yield gap versus Bunds - a market gauge of the

risk premium investors demand to hold Italian debt - was at

93.50 bps, after tightening 5 bps the previous day.