By Stefano Rebaudo
Oct 20 (Reuters) - French government bond yields remained near 24-year highs on Tuesday after their biggest daily rise in nearly a month, with trading volatility to the fore as French protestor groups called for further demonstrations after last weekend's unrest.
Euro zone bond yields fell over the course of the afternoon in Europe.
French OAT yields were last down 3 basis points (bps) at 4.88%, having traded at a session high of 4.9877%, slightly less than the early October peak
of 4.9937%, which was the most since July 2002.
The premium on OAT yields over German Bunds, the benchmark for the wider euro zone, widened by about 2.5 bps at 150 bps, indicating underperformance of French debt to Germany's. The gap reached 158.67 bps in early October, its highest since November 2011.
The Italian spread, meanwhile, narrowed by 1.57 bps to 109.5 bps.
"While we think the direct economic effects are likely to remain limited for now, the possibility of further disruption adds another headwind to an economy already weakened by tighter financial conditions, elevated political uncertainty and contractionary fiscal policy," Goldman Sachs strategists said.
French far-right leader Marine Le Pen and hard-left rival Jean-Luc Melenchon extended their lead over other candidates in a poll published last week before the weekend's events — a scenario analysts view as the least favourable for efforts to reduce France's fiscal deficit.
"The protests highlight that any government will struggle to implement the required reforms and savings against broader public resistance," said Benjamin Schroeder, senior rates strategist at ING.
"The beneficiaries (of the protests' political fallout) appear to be the right and centre candidates, while on the far left, Melenchon’s chances of winning the presidential race have been pared back," he added, arguing that Melenchon’s plans are viewed as among the most controversial.
Meanwhile, euro zone benchmark Bund yields edged lower but traded within their recent range after last week’s drop as persistent energy price pressures kept investors from scaling back bets on further European Central Bank rate increases.
Analysts said it will be difficult to materially reduce the market's bias towards further rate hikes because a credible decline in energy prices remains elusive and winter weather is likely to play its part in determining the path of gas prices.
Germany’s 10-year government bond yields, the euro zone benchmark, were down 7 bps at 3.385%, towards the lower end of the range in which they have traded this month, barring last Thursday’s drop, when tech stocks took a beating.
Germany's 2-year government bond yield, which is more sensitive to policy rate expectations, fell 5 bps to 3.045%.
(Reporting by Stefano RebaudoAdditional reporting by Amanda CooperEditing by Hugh Lawson and David Goodman)
