Pre-vote caution drags French bond yields back from 3-month lows


UPDATE 2-Pre-vote caution drags French bond yields back from 3-month lows

* 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

 (Recasts to reflect reversal in French yields)
    By Abhinav Ramnarayan and Dhara RanasingheLONDON, 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. [nL8N1HT1NV]
    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 <FR2YT=TWEB>. Ten-year yields were 2.5 bps higher
at 0.88 percent <FR10YT=TWEB>, 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
<DE10YT=TWEB>, 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. [nL8N1HS760]
    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
    The yield on Germany's benchmark 10-year Bund was little
changed on the day at around 0.25 percent <DE10YT=TWEB>, 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.  [nL8N1HT0KY]
    "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. [nU8N1D302M]
    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. [nU8N1D302O]
    In the United States, Markit's flash composite PMI for April
dipped to 52.7 from 53 in March.

Decision Europe: Full election coverage    cpurl://apps.cp./cms/?navid=72745
 (Editing by)
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