* French yields hit lowest since mid-Jan
* Further falls expected if Macron wins TV debate
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
By John Geddie
LONDON, May 3 A televised debate between
France's presidential rivals on Wednesday could compound
expectations for many investors that centrist Emmanuel Macron
will topple far-right eurosceptic Marine Le Pen at a weekend
French government bond yields fell to their lowest since
mid-January, while the gap to German bond yields -- a
closely-watched gauge of political risk -- held near its lowest
level since December, and the euro held near its highest in six
months ahead of the evening debate.
Analysts said markets could rally further if Macron, who
already holds a 20 point lead over Le Pen in the polls with just
four days to go before the vote, wins Wednesday's encounter.
"We think European government bond markets could be tempted
to start pricing a Macron victory in the last days of the week
but this is likely to wait at least until the outcome of the
debate tonight," Mizuho's head of euro rates strategy Peter
Though Le Pen has a mountain to climb to catch Macron, the
2017 campaign for the Elysee has been packed with surprises, the
exchanges between the two have become noticeably sharper and the
48-year-old National Front veteran has shown she is capable of
catching him out with clever public relations manoeuvring.
Macron warned he would not pull his punches on Wednesday
against a rival whose policies -- which include ditching the
euro currency and impose sharp curbs on immigration -- he says
are dangerous for France.
Macron finished only three points ahead of Le Pen in the
first round on April 23, but he is widely expected now to pick
the bulk of votes from the Socialists and the centre-right whose
candidates were eliminated.
French 10-year bond yields fell 1 basis point on Wednesday
to 0.738 percent, its lowest levels seen since
The gap to German equivalents stood at around 43 basis
points, near levels last seen in December.
Analysts are expecting further tightening of around 10 basis
points if Macron triumphs in Sunday's vote. But if investors are
convinced after tonight's debate, some of that may come in the
last couple of trading days before the election, they said.
"If Le Pen fails to perform unambiguously better than her
liberal rival (at the debate), this crossing of swords could
already decide the battle in Macron's favour," DZ Bank
strategist Daniel Lenz said.
Aside from the French election, investors will also be
keeping an eye on a meeting of the U.S. Federal Reserve at which
it may hint it is on track for a rate hike in June.
The central bank is scheduled to release its policy decision
at 2 p.m. EDT (1800 GMT) at the conclusion of its two-day
meeting. Fed Chair Janet Yellen is not due to hold a press
For Reuters Live Markets blog on European and UK stock
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(Additional reporting by Richard Balmforth)