* France/Germany bond yield spread tightest in 6 months
* Italian yields set for biggest 1-week drop this year
* German Bund-yield at 6-week high
* Confidence in Macron win lifts sentiment
* Macron extends lead to 62-38 pct ahead of Sunday's vote
* Euro zone periphery bond yields tmsnrt.rs/2ii2Bqr
By Abhinav Ramnarayan and Dhara Ranasinghe
LONDON, May 5 Confidence that centrist Emmanuel
Macron is about to become France's next president swept across
euro zone markets on Friday, boosting lower-rated Italian bonds
and pushing the gap between French and German 10-year bond
yields to six-month lows.
On the last day of trade before Sunday's runoff French vote,
investors continued to take risk off the table, selling
safe-haven German government bonds and snapping up riskier
European stocks extended their gains, with France's
blue-chip stock index scaling a new 9-1/2 year high.
Macron is seen winning 62 percent of the vote in Sunday's
second round compared to 38 percent for far-right Marine Le Pen,
a poll showed on Friday - also the final day of the election
The French/German 10-year bond yield gap tightened to a
six-month low of 35 basis points, extending moves seen on
Thursday after Macron emerged as the more convincing candidate
in a TV debate with Le Pen and a poll showed his En Marche
movement set to become the largest party in June parliamentary
The yield on Germany's benchmark 10-year Bund, viewed as one
of the safest assets in the world, rose 3 basis points to a
six-week high at 0.42 percent.
But the most eye-popping moves came in peripheral bond
markets, which had suffered in recent months from euro zone
break-up risks as investors worried about the popularity of the
anti-euro Le Pen.
Italy's 10-year bond yield slid 8 basis points to 2.16
percent and was on track for its biggest one-week
fall this year.
Like France, Italy's bond market had also been hurt by
concerns about the popularity of anti-establishment parties.
After France, elections in Italy in early 2018 if not sooner,
have been viewed as the next big risk event for markets with
eurosceptic 5-Star Movement polling well.
"Whether we are asking hedge funds or real money or U.S.
investors or UK investors, it seems that far too many people
have been short and bearish on this simplistic idea that it is
Italy's turn next," said Mark Dowding, portfolio manager at
BlueBay Asset Management.
"But we are talking about an election that is a good 10
months or so away and also even if 5-Star is the biggest party,
they'll still be in coalition, and they appear to have been
moderating their stance with regard to EU membership."
Portugal's 10-year bond yield tumbled to a six-month low at
3.38 percent, and Spanish yields were down 4 bps
at 1.55 percent.
"VERY GOOD WEEK"
"Peripherals have had a very good week as concerns of an
upset (in the French election) have dissipated and Italy has
lagged the move so I can see why it is the focus today," said
Rabobank strategist Richard McGuire.
"A Macron victory is a positive for Italy - but I do think
from a longer strategic viewpoint as we get closer to Italian
elections that (Italy-Germany) spread could shift again."
Ratings agency S&P Global on Friday confirmed Italy's credit
rating at BBB- with a "stable" outlook, saying it expected
Italy's economic recovery will "remain on track".
Italy's service sector grew in April at its fastest rate for
almost a decade, bolstering prospects for near-term economic
growth, a survey showed on Thursday.
"Italy is still a problem child, but the PMI numbers were
much better than in previous months and it seems that this year
could turn out to be a positive one for the European economy,"
DZ Bank rates strategist Daniel Lenz said.
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 John Geddie, editing by Ed Osmond)