July 23 (Reuters) - Euro zone government bond yields

dropped on Tuesday after rising the day before as investors

awaited developments in the U.S. presidential election campaign

amid expectations of stability in the European Central Bank's

monetary easing path.

U.S. President Joe Biden abandoned his reelection bid on

Sunday and endorsed Vice President Kamala Harris as the party's

candidate to face Republican Donald Trump.

Analysts said it would take weeks before clues emerged about

whether Harris can undermine Trump's chances of winning the Nov.

5 election.

U.S. Treasury yields edged up on Monday as markets assessed

the uncertainty surrounding the race for the White House.

Germany's 10-year government bond yield, the

euro area's benchmark, dropped 3 basis points (bps) to 2.45%

after rising 2 bps the day before.

ECB Vice-President Luis de Guindos hinted at a possible

interest rate cut in September, singling out the ECB's new

projections as the "most important" factor in determining

whether inflation is falling back to target.

Money markets are currently pricing an around 80% chance of

a rate cut in September and the same chance

of two additional rate cuts by year-end..

"As Fed and ECB cuts start materialising, we expect yields

to go lower, but a well-anchored terminal ECB rate means that

the scope for lower rates could be limited in the euro zone,"

said ING analysts, recalling that all the ECB's Surveys of

Monetary Analysts have shown an ECB terminal rate of 2.25%.

The yield gap between Italian and German 10-year bonds

- a gauge of the risk premium investors demand to

hold Italian debt - was at 128 bps after last week hitting 120

bps, a level seen before French President Emmanuel Macron called

for snap elections, sending jitters across financial markets.

Macron's decision set off a political earthquake, offering

the far right a shot at political power and raising fears that

such a government could increase fiscal spending, threatening

the sustainability of France's public debt.

Those fears subsided after the outcome of the vote left

Macron's Together group in charge of forming a new government

without far-right and far-left parties.

"With the positive momentum and lighter supply ahead, we

estimate net issuance of close to zero until the end of the

year. BTP spreads have scope for further performance, not only

versus Bunds but also versus OATs," said Hauke Siemssen, rate

strategist at Commerzbank.

The yield spread between Italian and French bonds

hit 55 bps early last week, its lowest level since

October 2021.

The so-called peripheral euro zone countries, including

Italy, Spain, Portugal and Greece, have seen their yield spread

tighten as France's public debt trajectory has caused increasing

concern among market participants.