Oct 18 (Reuters) - Euro zone government bond yields

edged lower on Friday while money markets slightly increased

their bets on the European Central Bank's monetary easing path.

The ECB cut rates on Thursday for the third time this year,

saying inflation in the euro zone was increasingly under control

while the outlook for the bloc's economy was worsening.

Analysts argued that comments from ECB President Christine

Lagarde on Thursday sounded like an implicit downgrade of ECB

economic projections.

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

sensitive to ECB rate expectations, dropped 5 basis points (bps)

to 2.09%, its lowest level since Oct. 4.

Money markets priced an ECB deposit facility rate at just

below 2% in June 2025 -- implying a 25 bps

rate cut at every meeting until next summer -- from 2.15% on

Thursday before the ECB meeting.

They also fully priced a 25 bps rate cut in December

and an around 25% chance of a 50 bps move,

from 20% on Thursday.

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

the euro zone bloc, dropped 2 bps to 2.18%.

U.S. 10-year Treasury yields were flat to 4.10%,

after climbing on Thursday as data pointed to an economy on a

solid footing, easing market expectations for Federal Reserve

aggressiveness in cutting rates.

Later in the session, the Scope rating agency will update

its view on France, while Fitch and S&P will review Italy's

ratings after issuing their last comments about six months ago.

"Positive outlook changes to the BBB ratings (on Italy)

cannot be excluded," said Christoph Rieger, head of rates and

credit research at Commerzbank, adding that the economic outlook

is likely unchanged and that the deficit projections have

improved significantly since April.

Italy's 10-year yield was 3 bps lower at 3.37%,

and the gap between Italian and German yields held

steady at 117 bps, its lowest level since March.

"As a negative outlook reflects downside risks to the rating

over 12-18 months, a downgrade (of France debt) to AA- seems

possible tonight in light of the deterioration in fiscal

performance since then," he argued.

Commerzbank confirmed its tactical longs in 10-year OATs

versus Bunds as France is already trading in the range of

single-A rated peers.

The gap between French and German 10-year yields

- a gauge of the risk premium investors demand to

hold France's government bonds - tightened to 73 bps, narrower

than the levels seen before Prime Minister Michel Barnier

presented the budget for 2025, at around 77 bps.

The spread also hit 71.80 its lowest since Sept. 20.

Most analysts expect the far-right National Rally to support

the minority government of Prime Minister Michel Barnier, at

least in the short term.