French 10-year yield slips back after hitting highest since March

LONDON, Aug 28 (Reuters) - France's 10-year government bond yield declined slightly on Thursday but remained close to its highest level since March as concerns about the country's fiscal path lingered before a confidence vote in the government next month.

France has found itself repeating last year's market wobble as Prime Minister Francois Bayrou called a confidence vote for September 8, seeking the backing of opposition parties for his plan to cut debt and bring the deficit under control.

But the opposition from both the left and the right have said they will reject his proposal and look likely to end Bayrou's time in office, possibly paving the way for new legislative elections and delaying plans to shrink the deficit.

"No matter what kind of political solution there will be in the coming months, it doesn't change the fundamental problem that France has," said Jussi Hiljanen, rates strategist at SEB.

"They historically have run a substantial budget deficit and debt is on an unsustainable path."

France's 10-year government bond yield was down nearly 3 basis points at 3.49% on Thursday after touching its highest since March the day before at 3.54%.

The gap between French and German 10-year yields , a gauge of the premium investors require to hold French debt, was at 79 bps, close to its widest level since April, reached on Wednesday. Last year the spread touched 90 bps, its widest level since the euro zone crisis in 2012.

The yield gap between French and Italian 10-year bonds widened to about 10 bps on Thursday, after dropping into single figures earlier this week.

"Near term, we continue to have a negative view on France and expect further pressure on spreads," Jefferies economist Mohit Kumar said in a note.

Germany's 10-year yield, the euro zone benchmark, was up 1 bp at 2.70%.

The two-year yield, which is sensitive to changes in interest rate expectations, was up 3 bps at 1.95%, while the 30-year yield was flat at 3.31%.

The longer end of the curve remains in focus with investors as 30-year yields in Germany and France have both jumped to their highest since 2011 this month.

"What had been limiting the upside in European bond yields has been prospects for additional rate cuts from the European Central Bank," SEB's Hiljanen said.

"But now as those expectations are fading, there are more dominant forces pointing towards higher yields in the euro area."

The ECB left its deposit rate unchanged in July after cutting it eight times since the middle of last year, and signalled that it could keep rates on hold while it waits to see how economic risks develop.

Money market traders are pricing in just 9.5 bps of easing by year-end, implying about a 38% chance of a quarter-point cut. (Reporting by Samuel Indyk; Editing by Andrew Heavens and Susan Fenton)