LONDON, Oct 15 (Reuters) - French bonds rallied for a

second day on Wednesday, pushing yields to their lowest in two

months, after Prime Minister Sebastien Lecornu delayed

implementation of a key pension reform, thereby avoiding more

political gridlock in Europe's second-biggest economy.

French 10-year yields fell another 3 basis

points in early trading to 3.37%, the lowest since August 15,

bringing the decline so far this week to 10 bps, heading for the

largest weekly decline since May.

Lecornu on Tuesday suspended implementation of President

Emmanuel Macron's landmark pension reform until after the 2027

election, bowing to pressure from leftist lawmakers and

sacrificing one of Macron's legacy achievements to ensure the

survival of the government. Attention now turns to Lecornu's

deficit-squeezing budget plans for 2026.

"The proposed 2026 draft budget would aim for a 4.7% deficit

of GDP, which is broadly in-line with the previous outlook, and

without the pension reform puts the trajectory of deficit/GDP

closer to 5.0% over time," Jim Reid, a strategist at Deutsche

Bank, said.

"So even though that might read negatively from a debt

sustainability point of view, markets were reassured because it

was seen as raising the chances that Lecornu would remain as PM

and a snap legislative election would be avoided."

France's borrowing costs are among the highest in the euro

zone as investors have grown increasingly wary of holding its

sovereign debt given the fragility of the government's

finances.

Meanwhile, German 10-year yields were down 1.4

bps on the day at 2.592%, having drawn strength this week from

mounting trade tensions between the United States and China.