* Japan investors sell 13.4 bln euro of French bonds
* Worries about presidential election hit nerve
* Japanese investors hold 12 pct of French bonds
* For graphic: tmsnrt.rs/2pje6NR
By Hideyuki Sano
TOKYO, April 10 (Reuters) - Japanese investors dumped a record amount of French bonds in February, rattled by the rising popularity of far-right candidate Marine Le Pen in the upcoming presidential election, data from the Ministry of Finance showed on Monday.
Japanese investors, who were major foreign buyers of French debt last year, sold 1.58 trillion yen (13.4 billion euros, $14.2 billion) of French bonds in February, surpassing a previous record of 1.25 trillion yen marked in June 2015.
“They are worried about the third surprise (after U.K referendum and U.S. Presidential election last year),” said Hideki Kishida, senior strategist at Nomura Securities.
While most investors see the chance of Le Pen winning as slim, risk-averse Japanese investors remain in no mood to stomach the chance of a victory, which could lead to a plunge in French debt prices.
French voters go the polls on April 23 and May 7 in the two-round election, which is being closely followed outside France as another test of popular discontent with traditional parties and institutions such as the European Union.
Le Pen’s anti-European Union stance has prompted investors to price in various risks, including the possibility that French bonds may be redeemed in a new national currency, such as a resurrected franc, not the euro.
Such worries drove the premium investors demand for holding French bonds over benchmark German debts to around 0.84 percent in February, hitting the highest level since 2012. The yield spread now stands at around 0.66 percent, still well above the premium of around 0.3 percent seen six months ago.
Japanese investors had flocked to French bonds last year after the Bank of Japan introduced its deeply unpopular negative interest rate policy, which wiped out yields in Japanese bonds.
The appeal of French bonds stems from their high credit rating, higher yields compared to German bonds and deep market liquidity that allows investors to trade a large amount without affecting prices too much.
From January to October last year, Japanese investors bought 4.23 trillion yen of French bonds. Analysts estimate Japanese investors held 27 trillion yen of French bonds, about 12 percent of the entire market, at the end of last year.
While most investors are expected to stay on the sidelines ahead of the elections, there are some who think French bonds now offer an attractive investment opportunity.
“In the big picture, the global bond sell-off triggered by expectations about Trump’s policy has come to an end,” said Akira Takei, a fund manager at Asset Management One.
“The outcome of the French election is hard to tell ... but the French opinion polls show not many people support an exit from the euro.”
$1 = 111.38 yen 1 euro = 117.78 yen Reporting by Hideyuki Sano; Editing by Sam Holmes