By Amanda Cooper

Euro zone government bond yields edged higher on Thursday, but remained near this week's lows, as investors dialled down their expectations for the European Central Bank to aggressively raise interest rates this year.

ECB President Christine Lagarde said on Wednesday the risks to euro zone inflation and economic growth were now more broadly balanced than a few weeks ago, given the recent fall in oil prices, which prompted traders to cut the chances of one more rate hike this year to around 87%, from closer to 100% a week ago.

The ECB, in its last policy decision, said that risks to growth were skewed to the downside, while inflation risks were skewed to the upside.

Two-year German Schatz yields (DE2YT=RR), the most sensitive to shifts in expectations for rates and inflation, have risen just 1.4 basis points this week, having touched their lowest since mid-April, as the oil price has retreated. They were last up 2 bps on the day at 2.539%.

Benchmark 10-year Bund yields (DE10YT=RR) were up for a fourth day in a row, trading 4 bps higher at 2.967%.

"Our read of Lagarde's comments is that the ECB would remain on hold if oil prices remain around current levels," Jefferies strategist Mohit Kumar said.

WARSH STICKING TO FED INFLATION TARGET

Lagarde was speaking at the ECB's annual forum in the Portuguese town of Sintra, where Federal Reserve Chair Kevin Warsh said he would stick firmly to the Fed's 2% inflation target and "disappoint" anyone who expected loose monetary policy, despite President Donald Trump's call for interest rate cuts.

Since Warsh took the helm at the Fed on May 22, U.S. Treasuries have noticeably underperformed other major bond markets, as investors rushed to factor in the possibility of rate hikes this year.

Two-year Treasury yields (US2YT=RR) have risen 5.15 bps in that time, compared with a drop of nearly 10.5 bps in German 2-year yields (DE2YT=RR), which have benefited from investors lowering their expectations for the ECB to deliver more than one rate hike this year.

The premium of 2-year Treasury yields over 2-year German (DE2US2=RR) is now around 165 bps, close to its highest since last September, reflecting the rising chances of Fed hikes versus the falling chances of many more from the ECB.

The main macro event is the monthly U.S. employment report for June later on Thursday. A Reuters poll of economists offers a forecast for an increase of 110,000 workers on non-farm payrolls, below May's 172,000 rise, while the unemployment rate is expected to remain at 4.3%.