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UPDATE 3-French 10-year bond yields hit one-month lows as political jitters ease
February 27, 2017 / 11:01 AM / 10 months ago

UPDATE 3-French 10-year bond yields hit one-month lows as political jitters ease

* French election jitters ease, yields at one-month low

* Polls show Macron easily beating Le Pen in runoff

* Socialists candidates fail to agree on alliance

* Italian yields fall as prospect of snap Italian elections dims

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices for close)

By Dhara Ranasinghe

LONDON, Feb 27 (Reuters) - French 10-year bond yields fell to a one-month low on Monday, tightening the gap with German peers on further signs that centrist candidate Emmanuel Macron is the clear favourite in France’s closely-watched presidential election.

Italian yields also hit one-months lows, as the prospects of snap elections in Italy dimmed after former prime minister Matteo Renzi said on Sunday it was up to his successor to decide whether Italy should hold its next national election before the term of the current legislature ends in early 2018.

Polls released over the last few days have shown Macron, a former economy minister running without the support of any traditional political party, extending his lead over the far-right’s Marine Le Pen in a May presidential election runoff.

Both would first have to get through the first round in April.

Unease at Le Pen’s strong showing in France’s presidential race has hurt French government bonds in recent weeks, with her anti-euro stance unnerving investors.

The election is held in two stages and Le Pen is expected to get more votes in the first round of voting than Macron or conservative Francois Fillon.

But Macron is seen as ultimately coming out on top and his bid has been boosted by last week’s alliance with centrist Francois Bayrou.

Concerns about Le Pen gaining ground were also eased after French Socialist presidential candidate Benoit Hamon and hard-left candidate Jean-Luc Melenchon indicated on Sunday that they had failed to agree on a possible alliance.

Christophe Caresche, head of the reformist branch of the Socialist party in the lower house of parliament, meanwhile told a newspaper on Sunday he would endorse Macron.

“Macron gained further support in the polls,” said DZ Bank rates strategist Rene Albrecht. “Another important point is that it looks like Hamon and Melenchon won’t merge, so there is less of a chance that we will have a left-wing candidate that could outpace Macron or Fillon.”

France’s 10-year bond yield fell as much as 4 basis points to a one-month low of 0.88 percent, outperforming top-rated German Bund yields, which were slightly higher on the day at 0.20 percent.

That pushed the French/German yield gap to around 68 bps, its tightest level in over a week and down from around 84 bps last week -- the widest since late 2012.

Italy’s 10-year bond yield fell to a one-month low at 2.13 percent.

ITALIAN FACTOR

In addition to easing French jitters, analysts said expectations for snap Italian elections, viewed as another key risk, had fallen after Renzi’s weekend comments.

“My understanding is that the news from French domestic politics and polls are behind this re-pricing of (French bond) OATs, as are the more distant prospects for Italian elections -- now more likely to take place in autumn at the earliest, versus as soon as June that was feared before the weekend,” said Commerzbank strategist David Schnautz.

Renzi, who quit as premier in December, had earlier called for elections to be brought forward to June, eager for a swift return to office. With that in mind, he wanted to wrap up his ruling Democratic Party’s (PD) leadership vote in early April to enable a snap ballot.

But the PD said on Friday that it would hold its leadership contest only on April 30, a decision that effectively rules out any snap national election in June.

Italy on Monday sold 10 billion euros at a auction, at the top of a planned issuance range.

Editing by Jeremy Gaunt

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