June 18 (Reuters) - Euro zone government bond yields

edged lower on Tuesday, with investors awaiting U.S. economic

data later in the session while closely watching political

developments in France.

The risk premium investors demand to hold French government

bonds dropped from its recent highs amid hopes France's National

Rally will backtrack on fiscally expensive pledges should it win

coming elections.

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

the euro area, fell one basis point (bp) to 2.40%, after falling

26 bps last week.

The gap between French and German 10-year government bond

yields - a gauge of risk premium on French

government bonds - narrowed 1.5 bps to 72.7 bps after hitting

82.34 bps on Friday, its highest level since February 2017.

Italy's 10-year yield was down 3.5 bps at 3.91%,

while the Italian-German yield gap narrowed

slightly to 150 bps.

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

sensitive to European Central Bank rate expectations, was 0.5

bps higher at 2.82%.

Money markets price in a cumulative 65 bps of European

Central Bank rate cuts by year-end,

implying a further 25 bps move and a 60% chance of a third cut

in 2024. They also discount 47 bpd from the Fed this year.