* Election nerves push French-German spread to 6-wk high
* Investors sell low-rated euro zone govt bonds
* Yield on safe haven German bond hits fresh 5-week low
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
By Abhinav Ramnarayan
LONDON, April 10 France's borrowing costs hit
their highest level compared with Germany's for six weeks on
Monday, as investors fretted over the rise of far-left candidate
Jean-Luc Melenchon in polls before this month's presidential
Melenchon's emergence over the past week has raised the
possibility that he will square off against far-right leader
Marine Le Pen in the election's decisive second round in May,
making the final result unpredictable.
"Two weeks ago, investors were starting to get comfortable
with the idea of a Macron victory, but with the rise of
Melenchon this is on the verge of becoming a four-horse race,"
said Rabobank strategist Lyn Graham-Taylor.
"A Melenchon win would be a very market-unfriendly event,"
Graham-Taylor added. "Enough reason to go short on France if you
The gap between French and German bond yields has shot wider
in recent months on the possibility that Le Pen will win the
keys to the Elysee Palace and try to take France out of the euro
single currency bloc.
The spread came off its February highs as centrist Emmanuel
Macron made gains and polls suggested he would go face to face
with Le Pen in the second round and win comfortably.
But recent polls have shown the race tightening as the
front-runners faltered and Communist-backed maverick Melenchon
surged after strong performances in two televised candidates'
France's 10-year bond yield rose as much as 7 basis points
to 0.95 percent, stretching the gap with German
equivalents to 72 basis points, its widest since
Investors also dumped low-rated South European government
bonds such as Italy's on Monday with yields on 10-year bonds up
2 bps on the day.
These "peripheral" bonds tend to perform badly when there
are concerns over the future of the euro zone.
A heavy week of supply could also be weighing on government
bonds in a shortened week when liquidity would naturally be low
anyway, said Lenk. Five euro zone countries are due to sell
bonds via auctions this week.
There were yield gains further up the ratings curve as well,
but monetary policy expectations and increased geopolitical risk
pushed German 10-year yields a touch lower to a fresh five-week
low of 0.213 percent.
Commerzbank analysts attributed this to reduced expectations
for rate rises, prompted by dovish comments from European
Central Bank policymakers.
ECB President Mario Draghi said on Thursday he saw no need
to deviate from the ECB's stated policy path, which includes
bond-buying at least until the end of the year and record-low
rates until well after that.
Demand for low-risk assets also rose because of U.S. missile
strikes on Syria which have increased tensions in the Middle
East and worsened Russia-U.S. relations.
For Reuters Live Markets blog on European and UK stock
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(Reporting by Abhinav Ramnarayan; Editing by Andrew Roche)