By Dhara Ranasinghe and John Geddie
LONDON, March 14 (Reuters) - Germany’s 10-year bond yield fell from 14-month highs on Tuesday, as investors flocked back to safe-haven debt on the eve of Dutch elections and as French presidential candidate Francois Fillon was put under a formal fraud investigation.
In a volatile day of trade, Bund yields initially rose above 0.50 percent for the first time since January 2016, extending a move seen in recent days on expectations the U.S. Federal Reserve, and eventually the European Central Bank, will tighten monetary policy.
But the rise proved short-lived, with yields across the euro zone pushing lower as oil prices notched up steep falls, dampening inflation expectations, while developments in France refocused market attention on election risks there.
French presidential candidate Fillon was put under formal investigation by magistrates on Tuesday on suspicion of embezzling state funds -- a move that may ruin the right-winger’s hopes of winning power in May.
Dutch parliamentary elections on Wednesday -- viewed as a key test of populist sentiment in Europe -- also helped boost demand for safe-haven debt, analysts said.
“There’s a number of things at play here,” said Rabobank rates strategist Matt Cairns, referring to the fall in German yields.
“One is that we are leading into the Dutch elections and there is some general nervousness around that, while this formal investigation of Fillon doesn’t help his chances in the polls, which have been slipping already.”
Germany’s 10-year Bund yield was down 2.5 basis points at 0.45 percent in late trade, while yields across the euro zone were 2-4 bps lower.
France was the exception, underperforming after the Fillon news. French 10-year yields were flat at around 1.10 percent , pushing the gap over German peers to around 65 bps from 62 bps on Monday.
In an auction, the Netherlands tapped 2.275 billion euros bonds maturing in 2022, in what analysts said was a vote of confidence from investors ahead of Wednesday’s vote.
“We judge that the strong auction results show that Dutch bonds remain resilient. Demand was healthy as investors are apparently not worried about increased political risks,” ABN AMRO strategists said in a note.
A poll published on Monday showed Dutch Prime Minister Mark Rutte’s pro-business VVD party set to take 18 percent of Wednesday’s vote, ahead of 16 percent for Geert Wilders’ anti-Muslim Freedom Party.
Bond investors were also looking ahead to the conclusion on Wednesday of the U.S. Federal Reserve’s two-day policy meeting, at which it is set to raise interest rates. (Editing by Catherine Evans)