Nov 21 (Reuters) - German government bond yields edged

lower and spreads widened with markets weighing geopolitical

tensions and awaiting purchasing manager surveys (PMI), which

could affect expectations for the European Central Bank easing

path.

France is in the spotlight as Prime Minister Michel Barnier

is facing hurdles to passing the 2025 budget.

Russia launched an intercontinental ballistic missile during

an attack on Ukraine on Thursday, Kyiv's air force said, in the

first known use in the war of a powerful weapon designed to

deliver nuclear strikes thousands of kilometres away.

Germany's 10-year yield, the benchmark for the

euro area, was down 1.5 basis points (bps) to 2.32%.

Markets kept pricing in an ECB deposit facility rate at

around 1.95% by July while fully

discounting a 25-bps rate cut next month and a 20% chance of a

50-bps move.

The prospect of tariff hikes under the new U.S.

administration do not shift the inflation outlook in Europe, ECB

policymaker Francois Villeroy de Galhau said on Thursday, urging

the central bank to keep its options open.

The gap between French and German yields - a

gauge of the premium investors demand to hold France's debt -

widened 4 bps to 78.5 bps, after hitting 70.9 bps last week, its

tightest since Oct. 31.

French 10-year yields rose 2 bps to 3.11%.

Analysts flagged that the debate surrounding France's 2025

budget has been going on for more than a month. If lawmakers

cannot agree by mid-December, Barnier can invoke article 49.3 in

the constitution to pass the budget without agreement.

That would probably trigger a no-confidence vote that the

far-right party Rassemblement National (RN) and the left could

use to bring down the government.

RN leader Marine Le Pen on Wednesday threatened to seek to

topple Barnier's fragile coalition government if her RN party's

cost-of-living concerns were not incorporated into the 2025

budget.

Le Pen also said on Wednesday that the RN would vote for the

far-left La France Insoumise (LFI) party's proposal to drop

President Emmanuel Macron's pension reform.

According to economists, this reform is crucial to restoring

the French debt-to-GDP ratio to a sustainable declining path.

"While France's issues remain constrained to France rather

than becoming more systemic, we favour trading it via a French

underperformance versus Spain," Lyn Graham-Taylor, senior rates

strategist at Rabobank, said.

The yield gap between Spanish and French bonds

dropped to -7 bps after trading between 0 and -10 bps since

early October.

Italy's 10-year government bond yields, the

benchmark for the euro area periphery, rose 1 bp to 3.58%.

The yield spread between Italian and German yields widened 3

bps to 125 bps. It reached 115.90 on Wednesday, its tightest

level since mid-March 2024, ahead of a possible upgrade by

Moody's on Friday.

"Given the recent improvement in Italy's fundamentals, we

have pencilled in a change in rating outlook to positive from

Moody's in our forecasts for coming months and potentially this

week," Citi said in a research note.

Analysts expect Italy's debt-to-GDP ratio to decline and the

country to abide by the European Union's fiscal rules.