* Germany to sell 4 bln euros of five-year bonds
* Japanese investors sell French bonds, buy German debt
* German 10/2-yr bond yield gap widest since July 2014
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
By Dhara Ranasinghe
LONDON, March 8 (Reuters) - Germany sells 4 billion euros of five-year paper on Wednesday as further signs emerged that demand for government bonds from the euro zone’s benchmark debt issuer continues to grow.
Data released by Japan’s Ministry of Finance on Wednesday showed Japanese investors were net buyers of about 5.4 billion euros of German sovereign bonds in January, the largest amount since October 2014. At the same time, Japanese investors sold French bonds for the third month in a row.
Worries about the euro zone’s future as elections in the Netherlands and France loom, demand for top-rated bonds for use as collateral in funding markets and speculation the ECB is increasingly skewing bond purchases for its stimulus scheme towards shorter-dated German paper have all boosted demand for German bonds in recent weeks.
While worries about French election risks have ebbed in the past week, the popularity of anti-euro far right presidential candidate Marine Le Pen has alarmed investors, who have increasingly switched out of French debt for safer German paper.
“The environment is positive for this part of the curve,” said Antoine Bouvet, rates strategist at Mizuho. “There are a number of supportive factors such as euro zone break-up risk, which is increasing demand for shorter-dated German bonds.”
Euro zone bond yields were broadly higher early on Wednesday, with Germany’s five-year bond yield up 1.5 basis points at minus 0.54 percent. Investors typically sell bonds ahead of an auction to make way for the new supply.
In addition to political risks, a scarcity of eligible bonds for the European Central Bank’s monetary stimulus scheme means the ECB is buying more bonds with a shorter-dated maturity, putting downward pressure on bond yields.
According to Mizuho calculations based on ECB data released on Monday, the average maturity of German bonds bought for the ECB’s bond-buying programme fell to three years in February from eight years in January and 10 years in December.
German two-year bond yields dipped to a one-week low of minus 0.89 percent on Wednesday, pushing the gap with 10-year bond yields out to around 122 bps -- the widest since July 2014.
“Bunds look set to remain supported as the focus on political risks persist,” analysts at Commerzbank said in a note.
Portugal is also scheduled to sell bonds later on Wednesday, while focus was expected to turn to Britain which releases its budget later in the day.
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Reporting by Dhara Ranasinghe; Editing by Angus MacSwan