* Poll shows Socialists closing gap on Merkel's bloc
* Analysts say could result in more fiscal pledges
* Right-wing AFD seen losing support
* Euro zone periphery yields tmsnrt.rs/2ii2Bqr
By John Geddie
LONDON, Feb 3 Investors sold euro zone
government bonds on Friday after a poll showed Germany's
election race narrowing, which could signal fiscal stimulus in
the bloc's biggest economy and less support for right-wing
The poll late Thursday showed support for Germany's
centre-left Social Democratic Party (SPD) jumped to its highest
since the last federal election in 2013, closing the gap on
Chancellor Angela Merkel's conservative CDU/CSU bloc.
Meanwhile, support for the right-wing Alternative for
Germany (AfD) party dropped.
Analysts said pressure from the left made it more likely
that politicians in Germany, one of the main proponents of
austerity that some argue has held back the bloc's recovery, may
shift towards fiscal stimulus that would boost growth and
Higher inflation erodes the value of bonds, while better
growth prospects encourage investors to shift into riskier
assets like equities.
"If we believe there is a serious fight then the only
outcome is a looser fiscal policy in Germany because either a
new left-leaning government is going to spend money or Merkel
has to promise a lot of sweeties to the electorate to stay in
power," RBC's global macro strategist Peter Schaffrik said.
German 10-year yields DE10YT-TWEB edged up 2 basis points
to 0.45 percent, recovering from a one-week low hit on Thursday
after the U.S. Federal Reserve and the Bank of England signalled
they were in no rush to tighten monetary policy.
Most other euro zone yields - which move inversely to prices
- were up around 2-3 basis points. Germany's main stock index
rose slightly on Friday, in line with other bourses.
The SPD has been reinvigorated by the nomination of Martin
Schulz as its chancellor candidate.
In a theoretical direct vote, the poll showed Schulz would
beat Merkel, who has reined over the bloc's largest economy for
more than a decade.
While the elections in Germany will not be held until
September - and investors will have to navigate knife-edge vote
in the Netherlands, France and possibly Italy before then - some
analysts said signals that the anti-establishment AFD was losing
support had provided optimism for markets.
"One interpretation is that it squeezes out AFD because you
have two mainstream heavyweights now, so if you are looking for
an alternative to Merkel then some of that protest vote will be
absorbed by Schulz," Rabobank's head of rates strategy Richard
Investors were also awaiting U.S. jobs data at 1330 GMT that
could influence the future path of U.S. policy rates and exert
more upward pressure on yields. Economists polled by Reuters
expect employers to have added 175,000 jobs in January.
The U.S. central bank's meeting on Wednesday was viewed as
more dovish than expected after it said job gains remained
solid, inflation had increased and economic confidence was
rising, but gave no firm signal on the timing of its next rate
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 Tom Heneghan)