June 19, 2017 / 7:30 AM / 9 months ago

Overwhelming majority in parliament for Macron bolsters French bonds

* Macron wins strong parliamentary majority

* French/German yield gap tightens towards 7-month lows

* Focus turns to Macron’s reform agenda

* Brexit talks to begin

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

By Dhara Ranasinghe

LONDON, June 19 (Reuters) - The gap between French and German bond yields held near its tightest level in seven months on Monday, after French President Emmanuel Macron won a commanding majority in a parliamentary election — securing a strong mandate for pro-business reforms.

France’s 10-year government bond yield edged back towards seven-month lows around 0.58 percent hit last week after a first round of parliamentary elections pointed to a strong showing for Macron’s fledgling party.

Three pollsters projected that his Republic on the Move and its Modem allies would win 355 to 365 seats in the 577-seat lower house following Sunday’s second-round vote, fewer than previously forecast.

Record low voter turnout suggested France’s new leader, the youngest since Napoleon, would need to proceed carefully with reforms in a country where trade unions and street protests have in the past forced new legislation to be diluted.

“Macron will need to tread carefully, with some questioning the validity of his mandate on a 45 percent turnout, the lowest in fifty years,” said Michael Hewson, chief market analyst at CMC Markets UK.

“He will also face an enormous amount of resistance on the ground from the vested interests of the trade unions which still wield an enormous amount of influence, and could make life very difficult for the inexperienced new President and his party.”

But the scale of his victory gives Macron, a pro-European Union centrist, a solid platform to carry out his campaign promises to revive the euro zone’s second biggest economy.

Sunday’s votes also draws a line under French elections, which had been viewed as a key risk to markets earlier this year given the popularity of anti-euro far-right leader Marine Le Pen heading into presidential elections in April and May.

The gap between French and German bond yields - an important gauge of risk appetite - had widened sharply heading into those elections but has since tightened as Macron’s election as president and growing expectations that his new party would perform well in the parliamentary elections lifted investor sentiment.

The French/German 10-year bond yield gap was at 35 bps on Monday, having hit its tightest levels since November last week. That’s down more than 40 bps from highs seen in February at the height of French election jitters.

“Macron’s overwhelming majority should confirm already constructive sentiment,” Commerzbank analysts said in a note.

Positive developments in French politics contrasted with turbulence in Britain, where a weakened government on Monday kicks off divorce talks with the EU.

Outside France, most euro zone bond yields were little changed on the day.

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 Louise Heavens

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