* French bond yields rise, reverse early drop
* Final day of trade before first round of French vote
* Traders say liquidity low before Sunday’s election
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Recasts to reflect reversal in French yields)
By Abhinav Ramnarayan and Dhara Ranasinghe
LONDON, April 21 (Reuters) - France’s government bond yields pulled back from three-month lows on Friday, as a sense of caution set in during the final hours of trade before a close-run French presidential election.
Ten-year bonds yields initially fell, with traders focusing on the final polls ahead of Sunday’s first-round vote and played down the impact of the killing overnight of a policeman in Paris.
Two polls on Friday pointed to a low likelihood of victory for anti-euro candidate Marine Le Pen, although both were conducted before the attack.
Still, as the session wore, French yields edged back up, indicating a degree of caution among investors.
France’s two-year bond yield rose 4 basis points to minus 0.39 percent. Ten-year yields were 2.5 bps higher at 0.88 percent, off three-month lows hit earlier in the day at 0.80 percent.
“The rise in French yields could be election-related but liquidity is low heading into Sunday’s vote and real-money investors would already have moved to the sidelines,” said Kim Liu, senior fixed income strategist at ABN AMRO.
The gap between French and German 10-year borrowing costs , a key indicator of concerns over the presidential elections in recent months, stood at around 63 bps - having dipped earlier below 60 bps for the first time this month.
The spread narrowed sharply on Thursday as investors starting taking off hedges put in place to protect against a potential victory for Le Pen.
Centrist Emmanuel Macron is set to come out on top in Sunday’s vote as Le Pen fell further behind him in an Elabe poll published on Friday.
The poll was conducted on Wednesday and Thursday.
An Ipsos poll published Friday also put Macron in the lead.
Still, with four leading candidates in a race that is still too close to call, overall trade in euro zone bonds markets was subdued.
The yield on Germany’s benchmark 10-year Bund was little changed on the day at around 0.25 percent, while most other yields were a touch higher.
Sunday’s round of voting will be followed by a second-round run-off on May 7 between the top two candidates.
Markets appeared to show little immediate reaction to an attack in Paris late on Thursday.
“We have not seen too much of a downside in the market from Paris attacks, and if anything the strong (French purchasing managers index) data this morning has helped settle nerves ahead of the elections,” said Investec economist Victoria Clarke.
French business activity confounded expectations in April by growing at the fastest pace in nearly six years.
Euro zone PMI data was also strong, showing businesses in the bloc increased activity at the fastest rate for six years as new orders stayed robust.
In the United States, Markit’s flash composite PMI for April dipped to 52.7 from 53 in March.