Sept 18 (Reuters) - Italy's bond yield fell below

France's for the first time on Monday, highlighting shifting

dynamics in euro zone debt, while euro area borrowing costs

edged down after the Federal Reserve's meeting left rate-cut

expectations largely unchanged.

The Fed decision to cut rates by 25 bps falls far short of

the steep cut President Donald Trump has demanded and which were

apparently pencilled into projections submitted by new Fed

Governor Stephen Miran.

A Bank of England rate decision and minutes of its policy

meeting are due later in the session.

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

euro zone bloc, fell 0.5 basis points (bps) to 2.67%.

Market pricing for Federal Reserve rate cuts is little

changed from pre-meeting levels, with traders expecting 44 basis

points of easing by year-end and 120 bps by end-2026. The

current federal funds target range stands at 4.00%-4.25%.

The benchmark 10-year U.S. Treasury yield fell 2

bps to 4.06% in early London trade, after rising 5 bps on

Wednesday.

Markets priced in a 45% chance of a 25-basis-point rate cut

by the European Central Bank by June 2026,

which would bring the depo rate to 1.75%. The key rate is seen

at 1.95% by end 2026.

Germany's 2-year yields, more sensitive to

expectations for ECB policy rates, dropped 0.5 bps to 2.0%.

The yield gap between safe-haven Bunds and 10-year French

government bonds - a market gauge of the risk

premium investors demand to hold French debt - was at 80 bps.

Italy's 10-year yields were down 1.5 bps at

3.48%. France's OAT yields fell 1.5 bps at 3.47%.

Italy's 10-year yields dropped for the first time below

France's earlier on Monday.