March 20, 2017 / 11:44 AM / 4 months ago

UPDATE 2-French bonds on defensive before first TV debate in presidential race

4 Min Read

* Bond yields nudge up, France trading nervous

* Televised debate between French presidential candidates awaited

* Portugal outperforms market after S&P Global affirms rating

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds Portugal move, updates prices)

By Dhara Ranasinghe

LONDON, March 20 (Reuters) - The premium that investors demand to hold French instead of German debt rose to its highest in almost two weeks on Monday, reflecting unease among investors before the first televised debate in France's turbulent presidential race.

Across the euro zone, high-rated government bond yields edged up as a perception that the European Central Bank may be preparing to scale back its ultra-easy monetary policy dented appetite for fixed income.

But trading around French bonds was particularly nervy, and the spread over German equivalents hit 68 basis points at one stage, its widest in almost two weeks.

French voters go the polls on April 23 and May 7 in the two-round election, which is being closely followed outside France as another test of popular discontent with traditional parties and institutions such as the European Union.

A poll released on Monday showed far-right leader Marine Le Pen would lead first round voting with 27 percent, ahead of independent centrist Emmanuel Macron on 23 percent. Macron was seen beating Len Pen in the run-off vote.

Monday's televised debate is also seen as an opportunity for scandal-hit conservative candidate Francois Fillon to get back in contention.

"A tired cliché is to say that such debates only confirm voters' intention rather than convince them to shift from one candidate to another," said Mizuho rates strategist Antoine Bouvet.

"We think the importance of this debate should not be underestimated. Only 60 percent of voters polled by Ifop say they have made up their mind."

At one stage France's 10-year government bond yield rose 4 basis points to 1.14 percent, within sight of multi-month highs hit in February, though it settled at 1.10 percent towards the close.

Most other euro zone yields edged higher, with the outlook for ECB monetary policy the other key focus for investors.

ECB policymaker Ignazio Visco was reported saying the central bank could step away from its pledge to keep interest rates low after ending quantitative easing.

Comments from the ECB's Ewald Nowotny suggesting rates could rise before the end of bond-buying stimulus triggered a sharp sell-off at the end of last week.

"We haven't see a consistent message from ECB Governing Council members on this," said DZ Bank strategist Andy Cossor. "So we are waiting for more speeches from ECB heavyweights to see how the thinking is developing."

Portugal and Spain bucked the general trend though, with Portugal's 10-year borrowing costs dropping as much as 6 basis points to 3.96 percent.

The fall in yield comes after ratings agency S&P Global affirmed the country's rating late on Friday.

Elsewhere, Slovakia and Belgium sold bonds on Monday, while euro zone finance ministers were meeting in Brussels to wrap up a bailout review on Greece.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets

Editing by Catherine Evans and Pritha Sarkar

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