French bond yields steady as snap election worries ease

Oct 9 (Reuters) - French bonds held on to gains from the day before on optimism the country can avoid a snap election and agree a budget, after talks between caretaker Prime Minister Sebastien Lecornu and other political leaders.

Lecornu resigned on Monday after failing to reach compromises with other parties on fixing the country's shaky finances, and had been tasked by President Emmanuel Macron to defuse the crisis.

Although no agreement has been reached, Macron said on Wednesday that a new prime minister would be named within 48 hours and that most lawmakers were against snap elections, following Lecornu's discussions.

RELIEF FOR MARKETS

France's 10-year bond yield FR10YT=RR was little changed on the day at 3.515%, after falling 5.5 basis points (bps) the day before on optimism that a deal to avoid new elections could be reached. Bond yields move inversely to prices.

Germany's 10-year bond yield DE10YT=RR, the benchmark for the euro area, was up 1 bp to 2.686%, pushing the spread between France and Germany's 10-year yields to 82.8 bps, down from nearly 88 bps on Monday.

The gap, the premium investors require to lend to France rather than Germany, remains elevated and is among the highest in the euro zone.

"Whilst we understand that avoidance of fresh elections will be a relief for markets, it is hard to see a budget that does little to tackle fiscal sustainability being a massive spread tightener over the medium term," said analysts at RBC Capital Markets in a note.