* French government bond yield touches four-month low
* Further falls expected if centrist Macron wins TV debate
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices)
By John Geddie
LONDON, May 3 (Reuters) - A televised debate between France’s presidential rivals on Wednesday could raise expectations for many investors that centrist Emmanuel Macron will defeat far-right eurosceptic Marine Le Pen at a weekend run-off election.
French government bond yields fell to their lowest in four months in trading ahead of the evening debate, while the gap to German bond yields, a closely-watched gauge of political risk, held near its narrowest point since December, and the euro held near its highest in six months ahead.
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,” said Peter Chatwell, Mizuho’s head of euro rates strategy.
Though Le Pen appears to have a mountain to climb to catch Macron, the 2017 campaign for the French presidency has been packed with surprises, the exchanges between the two have sharpened markedly and Le Pen 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 his National Front 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 election’s 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.
“Even if Le Pen has a fantastic debate I don’t think she is going to be able to cover that wider gap (in the polls),” said Iain Stealey, a portfolio manager at JPMorgan Asset Management, adding that a Macron victory was “baked into” market pricing.
French 10-year bond yields fell 3 basis points at one stage on Wednesday to 0.72 percent, its lowest level seen since Jan. 3.
Yields on other low-rated euro zone bonds, which had previously been shaken by French election risks, also fell: Spanish and Italian 10-year borrowing costs dropped by 4 bps each and the Portuguese equivalent by as much as 9 bps.
The gap between French and Europe’s benchmark German 10-year yield stood at 41 bps, near levels last seen in December.
Some analysts are expecting further tightening of as much as 10 bps if Macron triumphs in the May 7 run-off. But if investors are convinced after Wednesday’s debate, some of the tightening may come in the last few trading days before the election.
“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 U.S. central bank was 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 news conference, however.
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
Additional reporting by Richard Balmforth; Editing by Mark Heinrich