* First round of voting in French elections on Sunday
* Most unpredictable election in decades
* French/German 10-year yield gap close to six-week highs
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
By Dhara Ranasinghe
LONDON, April 18 France's borrowing costs rose
while Germany's held near three-month lows on Tuesday, with the
gap between the two close to six-week highs in a sign of unease
just days before a first round of voting in France's
closely-watched presidential race.
Opinion polls suggest the election in the euro zone's second
biggest economy will come down to a final battle between
independent centrist Emmanuel Macron and Marine Le Pen, head of
the anti-European Union and anti-immigrant National Front.
However, the race has tightened with a surge by far-left
candidate Jean-Luc Melenchon, which has put him neck-and-neck
with conservative Francois Fillon.
While no polls have show Le Pen missing out on the run-off,
to take place on May 7, they are now within the margin of error
and any two of the four top candidates have a shot at
It's that uncertainty that is expected to keep French
government bonds under pressure ahead of Sunday's election,
benefiting the euro zone's benchmark and top-rated issuer
"Investors are going to be very careful this week and
clearly the only thing that's going to be on their minds is what
happens in France," said Chris Scicluna, head of economic
research at Daiwa Capital Markets.
"Macron will win if he can get through to the second round
but the question is whether he will actually get there."
France's 10-year bond yield rose 2.5 basis points in early
Tuesday trade to 0.93 percent, while German Bund
yields were marginally lower at 0.18 percent and within sight of
Friday's more than three-month low of 0.16 percent
That left the gap between the two at 75 basis points and not
far from six-week highs hit last week around 78 bps.
The spread between short-dated French and German bond yields
was at 44 bps - also within sight of
France's presidential race, one of the most unpredictable in
decades, is viewed as a key risk event for markets with
investors cautious after last year's shock Brexit vote and the
unexpected election of U.S. President Donald Trump.
International Monetary Fund Managing Director Christine
Lagarde told German newspaper Die Welt in an interview published
on Tuesday that there is clearly rising concern about the French
The jitters are also reflected in currency markets, where
the cost of hedging against volatility in the euro over the next
month against both the dollar and yen on Monday jumped to the
highest levels since the results of Britain's vote to leave the
EU last June .
Bond strategists say European government bond markets are
unlikely to stabilise properly until after the run-off vote.
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 Jeremy Gaunt.)