* Yields on German and other core bonds up 1-2 bps
* France's 10-year yield spread over Germany falls 3 bps
* South European bonds rally as TLTRO cash flood looms
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
(Updates prices for close)
By Abhinav Ramnarayan
LONDON, March 21 Investors sold the lowest-risk
euro zone government bonds on Tuesday, pushing yields higher,
after a strong showing by centrist French presidential candidate
Emmanuel Macron in a televised debate on Monday night.
Concerns over the upcoming election have kept high-grade
bond yields compressed as investors sought out perceived safe
assets on worries that far-right leader Marine Le Pen would win
and attempt to take France out of the euro zone.
Any lessening of those concerns puts the focus back on the
prospect of tightening monetary policy, with the European
Central Bank set to scale down asset purchases in April.
"If you look at the last few weeks, unless there has been
negative economic releases on any given day, the general
sentiment has been that yields should be moving higher, so
whenever the market gets risk-on we see it moving in that
direction," said John Taylor, a portfolio manager for
"In addition, we have pretty high inflation numbers in the
UK today that likely support this move."
British inflation rose to an annual 2.3 percent in February,
exceeding the Bank of England's 2.0 percent target.
The yield on 10-year German government bonds rose 2 basis
points to 0.46 percent, and most other high-rated euro zone
government bond yields were up 1 to 2 bps.
With yields on French bonds slightly lower on the day, the
gap to German equivalents narrowed to 3 basis points.
"There were some doubts whether Macron would perform well
because of his relative inexperience, but the poll after the
debate shows him in the lead," said DZ Bank analyst Rene
A Harris Interactive poll on Tuesday said Macron had been
the most convincing candidate in the debate, adding weight to
two other polls that reached a similar conclusion.
Southern European bond yields also fell, with the 10-year
borrowing costs of Spain, Italy and Portugal all down 3 to 5
Those lower-rated countries are considered the most
vulnerable to the risk of a break-up of the euro zone, and
therefore tend to perform in line with sentiment around the
single currency bloc, said Albrecht of DZ Bank.
In addition, the European Central Bank's ongoing targeted
long-term refinancing operations (TLTRO) - under which it lends
money to euro zone banks at extremely attractive levels - may
have also had an effect.
South European banks, which normally have much higher
funding costs than northern peers, tend to make use of the TLTRO
programme to borrow money and that allows them to buy more of
"We have TLTRO coming and so we are seeing some buying at
the front end in Spanish and Italian bonds and that is
supporting 10-year spreads a little," said Taylor at
ING rates strategists expect a take-up of around 75 billion
to 100 billion euros in Thursday's operation, with risk skewed
to a larger take-up as more banks lock in four-year funding
costs at minus 40 basis points.
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 Larry King and Ed Osmond)