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UPDATE 1-French two-year bond yield set for biggest monthly fall since 2013
April 28, 2017 / 3:00 PM / in 8 months

UPDATE 1-French two-year bond yield set for biggest monthly fall since 2013

* French two-year yields set for biggest weekly fall in almost five years

* Biggest monthly fall in over four years as election risks fade

* Bund yields set for biggest weekly rise since early March

* Euro/dollar one-week implied volatility down sharply (Updates with details)

By Dhara Ranasinghe

LONDON, April 28 (Reuters) - France’s two-year bond yields were set to end April with their biggest slide in over four years on Friday, a sign that investors see little risk of anti-euro Marine Le Pen winning the final round of France’s presidential race.

Centrist Emmanuel Macron, who beat Le Pen into second place in Sunday’s first round, is expected to easily beat her in the May 7 run-off, according to latest opinion polls.

As worries over France and the potential break-up of the euro zone have receded in the past week, France’s bond market has racked up some its strongest gains in years.

The two-year government bond yield, which moves in the opposite direction to the price, was on track to finish the month down about 12 basis points, its biggest drop since February 2013.

It was trading on Friday at minus 0.52 percent, and set for its biggest weekly fall in almost five years with a drop of 14 basis points.

French 10-year bond yields were set for their biggest monthly fall since June 2016, down 20 basis points.

“The reduction in the Le Pen victory risk reduces redenomination risks,” said Alessio de Longis, a portfolio manager at OppenheimerFunds.

“We’re not completely out of the woods but the consensus is that those who voted for (conservative Francois) Fillon and (far-left Jean-Luc) Mélenchon will vote for Macron.”

French bond markets were battered earlier this year as investors fretted that Le Pen’s strong showing in opinion polls raised euro zone break-up risks.

That not only boosted demand for safe-haven German bonds but also hammered peripheral bond markets viewed as vulnerable to any fracturing of the single-currency bloc.

Southern European bond yields have all seen steep falls this week. Portugal’s 10-year yield was on track for its biggest monthly fall since July 2015, tumbling over 40 bps.

By contrast, German yields have risen not just as political risks in France fade but also as investors turn their attention to a pick-up in inflation and potential changes to ECB monetary policy.

German 10-year bond yields were set to end the week 7 bps higher - their biggest weekly rise since early March.

An ebbing in French political risks was also felt in currency markets.

Euro/dollar one-week implied volatility - derived from the price of options used to hedge against big price swings in the exchange rate - fell over 12 percentage points on the week, the biggest fall on record. (Editing by Jemima Kelly and Catherine Evans)

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