February 20, 2017 / 9:01 AM / 10 months ago

French bond selling abates, politics remains key focus

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

By Dhara Ranasinghe

LONDON, Feb 20 (Reuters) - French government bonds yields steadied on Monday, as investor concern about a tie-up between the two main left candidates in France’s presidential election - potentially opening the door to a far-right victory - eased.

France’s borrowing costs, which have gone up sharply this year on heightened concerns about the election, rose on Friday on worries that possible cooperation between Socialist Benoit Hamon and hard-left candidate Jean-Luc Melenchon could strengthen the position of the National Front’s Marine Le Pen.

Markets are concerned about Le Pen’s anti-euro stance, among other factors.

Should Hamon and Melenchon join forces, opinion polls suggest their combined vote could put them in the second round of voting on May 7 facing Le Pen - a scenario that has not been explored by major surveys in recent months.

But the weekend ended with no signs of a pact between the two leftist candidates, bringing some relief to French bond markets for now, analysts said.

Melenchon would raise spending by 273 billion euros ($290 billion), his team said in a presentation online on Sunday.

The proposed measures, which include a 15 percent increase in France’s minimum wage, new funds to fight poverty and create new jobs, underscore the gap Melenchon would have to bridge with Hamon in order to find a common platform for the April and May presidential election.

“It looks superficially that Hamon and Melenchon were not looking to tie-up and that reduces market pricing of a Le Pen victory,” said Mizuho rates strategist Peter Chatwell. “But there’s still a decent probability the two candidates are forced together.”

He added that because investors are heavily positioned against French bonds, any mildly supportive developments force a covering of those bets.

France’s 10-year bond yield dipped 0.5 basis points to 1.04 percent, squeezing the gap over German peers to around 73 bps from around 75 bps on Friday.

Germany’s benchmark 10-year bond yield rose 1 bps to 0.32 percent, while other euro zone bond yields were mostly little changed.

With U.S. markets closed for a holiday on Monday, trade was generally subdued and focus remained on political developments in the euro zone.

In Italy, former prime minister Matteo Renzi resigned as head of the ruling Democratic Party on Sunday, opening the way for a leadership fight in which he will take on rivals threatening to split the centre-left.

Martin van Vliet, a senior rates strategist at ING, said that while the leadership contest lowered the chances of snap Italian elections soon, the rift in the ruling party was negative for Italian bonds.

Euro zone finance ministers also meet later in the day to discuss Greece’s progress in fulfilling the conditions of its bailout.

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

Editing by Jeremy Gaunt

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