*

Investors await clarity on whether Macron will call snap

elections

*

Short-dated yields drop as traders slightly increase bets

on ECB

rate cuts

*

OAT-Bund yield spread widens to highest level since

January

*

French 30-year yield hits one-month high

By Stefano Rebaudo

Oct 6 (Reuters) - Short-dated euro area borrowing costs

fell, and the yield spread between French OATs and safe-haven

Bunds widened on Monday after French Prime Minister Sébastien

Lecornu resigned.

Markets are watching closely to see whether the next step in

France will be a snap election, with the far-right Rassemblement

National likely to play a leading role in the next government.

Meanwhile, ultra-long government bond yields pared earlier

gains after rising at the start of the session, following a

surge in Japan's 30-year borrowing costs to a record high amid

expectations of expansionary economic policies.

Germany's 10-year Bund yields, the bloc's benchmark, rose 2

basis points (bps) to 2.72%.

Germany's 2-year yields, more sensitive to

expectations for European Central Bank policy rates, dropped 1.5

bps to 2.00%, after hitting 1.987%, the lowest level since

September 12.

Traders slightly increased their bets on future European

Central Bank rate cuts. They priced in an about 40% chance of a

25 bps ECB rate cut by July from 35% before

Lecornu's resignations. The key rate is seen at 1.90% in

February 2027 from the current 2%.

The yield gap between safe-haven Bunds and 10-year French

government bonds - a market gauge of the risk

premium investors demand to hold French debt - hit 87.96 bps,

the highest level since January 13, on concerns about the French

fiscal outlook.

"The French-German yield spread is likely to widen further

even if President Emmanuel Macron appoints a new prime minister,

who would still face the same political gridlock that challenged

Lecornu," said Massimiliano Maxia, senior rate strategist at

Allianz Global Investors.

FRANCE 30-YEAR BOND YIELD HITS ONE-MONTH HIGH

French 30-year bond yields rose 9 bps to 4.42%,

after hitting 4.441%, its highest since September 4.

Japan's 30-year yields jumped 13.5 bps to 3.28%,

after hitting a new record at 3.301%.

Sanae Takaichi, who was poised to become Japan's new prime

minister, has been a vocal advocate of "Abenomics", a hefty mix

of government spending and monetary stimulus.

Expansive economic policies are expected to increase Japan's

sovereign debt, raising the risk premium investors demand to

hold ultra-long government bonds.

"Beneath the surface, market moves hint at speculation about

looming Dutch pension flows," said Hauke Siemssen, rate

strategist at Commerzbank, referring to moves in euro zone

sovereign bonds.

"With reports of three large pension funds shifting to the

Defined Contribution scheme on 1 Jan 2026, we suspect that

increased interest to unwind duration hedges could emerge from

these funds."

Under the current Defined Benefit model Dutch pension funds,

were major buyers of 30- and 50-year bonds. With the new Defined

Contribution (DC) model they no longer need to hedge long-term

liabilities with long-duration assets.

U.S. Treasury yields were up in early London trade, with the

30-year rising 4 bps to 4.75% after rising on

Friday.

(Reporting by Stefano Rebaudo; editing by Shinjini Ganguli)