* French bond yield hits one-month low
* Sentiment improves after Bayrou-Macron alliance
* French/German 10-year yield gap down from multi-year highs
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices)
By Dhara Ranasinghe
LONDON, Feb 23 (Reuters) - The extra return investors demand to hold French rather than German debt shrank from multi-year highs on Thursday as a new centrist pact in France’s presidential election race eased market concerns about far-rightist Marine Le Pen gaining ground.
Influential centrist Francois Bayrou on Wednesday decided not to run in the French election and struck an alliance with candidate Emmanuel Macron that may boost the latter’s chances in the tight race.
Markets are nervous about Le Pen’s anti-euro stance, and polls earlier this week showing her narrowing the gap with centrist contenders had rattled investors in the wake of the populist backlash in votes in Britain and the United States last year.
France’s presidential election takes place over two rounds, scheduled for April and May, and the National Front’s Le Pen is widely tipped to go through to the second-round runoff but then lose.
A poll on Wednesday showed Macron was seen beating Le Pen in the runoff by 60 percent to 40 percent.
“Yesterday’s developments in France were positive for French bonds and broader risk appetite,” said Orlando Green, European fixed income strategist at Credit Agricole in London.
France’s 10-year bond yield fell as much as 9 basis points to a one-month low of 0.95 percent on Thursday, extending falls seen after Bayrou’s announcement on Wednesday.
The gap between French and German 10-year bond yields, a gauge of how investors view relative risks, narrowed to around 70 basis points, having been at 84 bps earlier this week, its widest since late 2012.
“The break below 80 bps is a level at which domestic buyers are tempted to step back in to French bonds,” said Richard McGuire, head of rates strategy at Rabobank.
Rising euro zone bond yields and widening spreads in the region have not had a major impact on the real economy, and the European Central Bank will take a look at market developments after coming elections, board member Peter Praet said on Thursday.
German 10-year yields were close to their lowest levels this year at 0.23 percent, while Irish and Portuguese equivalents fell to one-month lows on Thursday.
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Editing by Andrew Roche