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French bond yields retreat from highs, election jitters remain

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Adds PIMCO comments in paragraphs 10-12, refreshes prices at 1510 GMT

By Samuel Indyk

LONDON, June 11 (Reuters) -France's 10-year government bond yield briefly hit its highest since November on Tuesday, rising for a fourth straight day after the president's decision on Sunday to call a snap election drove investors out of French assets.

France's 10-year bond yield FR10YT=RR leapt as much as 9.8 basis points (bps) to 3.338%, before handing back most of its gains. It had surged 12 bps a day earlier in its biggest one-day jump in 11 months, as the new election raised concerns about already fragile public finances, analysts said.

President Emmanuel Macron called the snap legislative election after heavy losses to Marine Le Pen's National Rally in the European Parliament election over the weekend.

Le Pen's far-right party would win a snap election but fall short of an absolute majority, according to a first opinion poll held since Macron called the vote.

"Markets are worried that the possible next government will not stick to fiscal consolidation," said Sophia Oertmann, analyst for EMU government bonds at DZ Bank.

Ratings agency Moody's warned that France's election was negative for its credit score, and the current 'stable' outlook could be cut to 'negative' if debt metrics worsen.

By the afternoon, the sell-off had lost some steam, leaving French 10-year yields up 1 bp at 3.25%.

That left the premium that investors demand to hold French debt over the German equivalent 5 bps wider at 62 bps DE10FR10=RR. At one point on Tuesday, that spread hit a high of almost 68 bps, its widest since October.

But that remains far below the 80 bps reached in 2017 when Le Pen, now less eurosceptic, vowed to leave the euro if elected during the French presidential election.

Andrew Balls, chief investment officer at PIMCO, one of the world's largest bond investors, said on Tuesday that the widening of French spreads could present a buying opportunity before too long.

"We didn't quite decide where, but at a certain point French spreads become attractive,” he said.

Asked at what point that could be, he added "not too far" from the current levels following the moves in recent days.

Elsewhere, German 10-year yields DE10YT=RR, the euro area benchmark, were down 3.8 bps at 2.636%, with markets keeping a close eye on events in the U.S. this week, with inflation data and a Federal Reserve policy announcement both on Wednesday.

"We've had yesterday and today to digest the results of the European elections but I would expect the market attention to come back to monetary policy and inflation from tomorrow onwards," DZ Bank's Oertmann said, describing the two data points as being the top influences for the market.

The European Central Bank cut interest rates for the first time in five years last week, but President Christine Lagarde said on Monday the central bank could wait several meetings between rate cuts, pouring cold water on a possible cut in July.

Italy's 10-year yield IT10YT=RR, the benchmark for more indebted countries of the euro zone, was up 1.6 bps at 4.097%, leaving the Italian-German 10-year yield gap DE10IT10=RR at 145 bps, its widest in three months.

Reporting by Samuel Indyk; Editing by Bernadette Baum and Mark Potter


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