* Battered French bond yields fall to 2-week low
* Other euro zone yields pull back from multi-month highs
* Analysts cite a covering of short positions
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
By Dhara Ranasinghe
LONDON, Feb 9 France's benchmark borrowing costs
fell back below 1 percent for the first time in two weeks on
Thursday, as fears about the political risks it faces gave way
to a sense that recent selling of French debt had gone too far.
Investor nerves jarred by the strong showing of far-right
leader Marine Le Pen's ahead of this spring's presidential
election helped send the spread between French bond yields over
German ones to multi-year highs this week.
As French bonds recovered ground on Thursday so did other
euro zone bonds that have suffered from heightened political
risks and worries about an unwinding of European Central Bank
Analysts said a build-up of short positions on French bonds
- essentially a bet that their value will decrease - had reached
a point that further negative news was needed to justify more
"We're in an environment where political risk is pretty much
at the forefront and we're not going to get any decisive news on
that for a number of days," said Orlando Green, European fixed
income strategist at Credit Agricole.
"There is an element of people closing out of their
positions and pausing for thought."
In addition, the view that the ECB is unlikely to unwind its
bond-buying stimulus in an environment in which political risks
remain elevated may have helped a recovery in euro zone bonds
generally, analysts said.
ECB President Mario Draghi said this week that no policy
tightening was coming as growth was still weak and faced risks.
He meets German Chancellor Angela Merkel later on Thursday.
France's 10-year bond yield fell 4 basis points
to a two-week low of 0.96 percent, pulling the gap over
top-rated German peers down from four-year highs.
The moves in French bond yields this week have been
On Monday, they soared to near 17-month highs at 1.16
percent as investors fretted about the most unpredictable
presidential election race in decades in the euro zone's second
But that move started to unwind on Thursday and yields fell
almost 11 bps -- the biggest one-day fall since December 2015.
Most other euro zone bond yields were down 1-6 bps.
Italian and Spanish bond yields fell about 5 bps each, with
Italian yields hitting a two-week low at 2.17 percent
In Germany, 10-year bond yields pulled away
from Wednesday's 2-1/2 week lows as demand for safe-haven German
Analysts said renewed worries about Greece were also
exacerbating investor jitters over euro zone stability.
Two-year Greek bond yields rose to around 10.09 percent
, their highest level since June last year.
Greece's bailout programme is being held up by a dispute
over the country's fiscal targets. The International Monetary
Fund argues that a primary fiscal surplus target of 3.5 percent
of gross domestic product cannot be met without massive debt
relief or further austerity measures that would hurt growth.
Germany, which faces national elections in September,
opposes any discussion of debt relief before Greece reaches the
"Tapering concerns and political risks have been the main
drivers of bond spreads in the euro zone, worries about Greece
could become the third pillar of that move," said Martin Van
Vliet, senior rates strategist at ING.
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
(Reporting by Dhara Ranasinghe, editing by Larry King and John