February 23, 2017 / 9:07 AM / 5 months ago

Battered French bonds fight back after Bayrou-Macron alliance

3 Min Read

* French bond yield dip to one-week low at 1pct

* Sentiment improves after Bayrou-Macron alliance

* French/German 10-year yield gap down from multi-year highs

* Fed rate uncertainty supports broader euro zone market

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

By Dhara Ranasinghe

LONDON, Feb 23 (Reuters) - The extra money investors demand for the risk of holding French rather than German debt shrank from multi-year highs on Thursday as a centrist pact in France's presidential election race eased market concerns about far-rightist Marine Le Pen gaining ground.

Francois Bayrou, an influential French centrist politician, on Wednesday decided not to stand in the election race and struck an alliance with presidential candidate Emmanuel Macron in a move that is seen boosting the latter's chances in the tightly contested election.

Markets are nervous about Le Pen's anti-euro stance and polls this week showing her narrowing the gap with centrist contenders has rattled investors wary after a populist backlash in votes in Britain and the United States last year.

Voting in France's presidential election takes place in two rounds, scheduled for April and May, and the National Front's Le Pen is widely tipped to go through to the second-round runoff but then lose.

Bayrou's decision to back Macron has bought some relief to battered French bond markets.

France's 10-year bond yield fell 2.5 basis points to a one-week low of around 1 percent, extending falls seen after Bayrou's announcement on Wednesday.

The gap between French and German 10-year bond yields, a gauge of how investors view relative risks, narrowed to around 73 basis points. The spread widened to about 84 bps earlier this week -- the widest level since late 2012.

"Yesterday's developments in France were positive for French bonds and broader risk appetite," said Orlando Green, European fixed income strategist at Credit Agricole in London.

Ireland's 10-year bond yield fell to a one-month low of 1.035 percent.

Most other euro zone bond yields were little changed on the day, with broader markets supported by an uncertain tone struck by the minutes of the U.S. Federal Reserve's latest policy meeting.

According to the minutes released on Wednesday, many Fed policymakers said it may be appropriate to raise rates again "fairly soon" should jobs and inflation data come in line with expectations.

U.S. Treasury yields edged lower after the minutes, helping keep benchmark 10-year German Bund yields close to five-week lows hit on Wednesday at around 0.24 percent.

"The February FOMC minutes failed to send a clear hike signal yesterday evening, providing a boost for Treasuries," analysts at Mizuho said in a note.

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 Jeremy Gaunt

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