* French government bond yield touches four-month low
* Further falls expected if centrist Macron wins TV debate
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
By John Geddie
LONDON, May 3 A televised debate between
France's presidential rivals on Wednesday could raise
expectations for many investors that centrist Emmanuel Macron
will defeat far-right eurosceptic Marine Le Pen at a weekend
French government bond yields fell to their lowest in four
months in trading ahead of the evening debate, while the gap to
German bond yields, a closely-watched gauge of political risk,
held near its narrowest point since December, and the euro held
near its highest in six months ahead.
Analysts said markets could rally further if Macron, who
already holds a 20 point lead over Le Pen in the polls with just
four days to go before the vote, wins Wednesday's encounter.
"We think European government bond markets could be tempted
to start pricing a Macron victory in the last days of the week
but this is likely to wait at least until the outcome of the
debate tonight," said Peter Chatwell, Mizuho's head of euro
Though Le Pen appears to have a mountain to climb to catch
Macron, the 2017 campaign for the French presidency has been
packed with surprises, the exchanges between the two have
sharpened markedly and Le Pen has shown she is capable of
catching him out with clever public relations manoeuvring.
Macron warned he would not pull his punches on Wednesday
against his National Front rival whose policies - which include
ditching the euro currency and impose sharp curbs on immigration
- he says are dangerous for France.
Macron finished only three points ahead of Le Pen in the
election's first round on April 23, but he is widely expected
now to pick the bulk of votes from the Socialists and the
centre-right whose candidates were eliminated.
"Even if Le Pen has a fantastic debate I don't think she is
going to be able to cover that wider gap (in the polls)," said
Iain Stealey, a portfolio manager at JPMorgan Asset Management,
adding that a Macron victory was "baked into" market pricing.
French 10-year bond yields fell 3 basis points at one stage
on Wednesday to 0.72 percent, its lowest level
seen since Jan. 3.
Yields on other low-rated euro zone bonds, which had
previously been shaken by French election risks, also fell:
Spanish and Italian 10-year borrowing costs dropped by 4 bps
each and the Portuguese equivalent by as much as 9 bps.
The gap between French and Europe's benchmark German 10-year
yield stood at 41 bps, near levels last seen in December.
Some analysts are expecting further tightening of as much as
10 bps if Macron triumphs in the May 7 run-off. But if investors
are convinced after Wednesday's debate, some of the tightening
may come in the last few trading days before the election.
"If Le Pen fails to perform unambiguously better than her
liberal rival (at the debate), this crossing of swords could
already decide the battle in Macron's favour," DZ Bank
strategist Daniel Lenz said.
Aside from the French election, investors will also be
keeping an eye on a meeting of the U.S. Federal Reserve at which
it may hint it is on track for a rate hike in June.
The U.S. central bank was scheduled to release its policy
decision at 2 p.m. EDT (1800 GMT) at the conclusion of its
two-day meeting. Fed Chair Janet Yellen is not due to hold a
news conference, however.
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
(Additional reporting by Richard Balmforth; Editing by Mark