By Jamie McGeever
LONDON (Reuters) - French 10-year bond yields hit a one-month low on Monday, pushing other euro zone sovereign yields lower, while a more cautious mood hung over world stock markets and the dollar, both of which struggled for clear direction.
The fall in French bond yields came as polls showed centrist Emmanuel Macron would easily beat far-right candidate Marine Le Pen in May's presidential election runoff, relieving some fears that have built up in recent weeks among investors.
"Macron gained further support in the polls," said DZ Bank rates strategist Rene Albrecht. "Another important point is that it looks like Hamon and Melenchon won't merge, so there is less of a chance that we will have a left-wing candidate that could outpace Macron or Fillon."
Hard-left candidates Benoit Hamon and Jean-Luc Melenchon have said they are discussing cooperation in their bid for the presidency but are seen struggling to find a common platform.
World stocks and the dollar trod water, while U.S. Treasury yields recovered some ground following last week's decline, the steepest weekly fall in months.
In Europe, the French-led fall in bond yields and tightening of spreads over Germany were the most notable moves at the start of a week in which U.S. President Donald Trump's State of the Union address on Tuesday will loom large.
Trump is expected to unveil some elements of his plans to cut taxes in his joint address to Congress.
France's 10-year bond yield fell 2.5 basis points to a one-month low of 0.90 percent
Fears about the French election had pushed the yield gap to around 84 bps last week - the highest since late 2012.
Benchmark Spanish, Italian and Portuguese yields all fell between 3 and 5 basis points.
The 10-year U.S. Treasury yield rose 2 basis points to 2.335 percent (US10YT=RR). On Friday it hit a five-week low of 2.31 percent, and last week's fall of nearly 11 basis points was the steepest weekly decline since July last year.
YIELDS, DOLLAR EYE TRUMP, YELLEN
It was also a mixed bag in stocks. Benchmark European markets were flat, Asian bourses fell and U.S. futures pointed to a slightly higher open on Wall Street (ESc1)
"This morning's moves follow what was a fairly cautious end to the week on Friday for markets," said Jim Reid, markets strategist at Deutsche Bank (DE:DBKGn).
MSCI's benchmark world stock index slipped 0.1 percent to 444.53 points (MIWD00000PUS), on course for its first consecutive daily fall for three weeks. On Thursday, it hit a record high of 447.67 points.
The index of the leading 300 European stocks (FTEU3) was flat on the day at 1,457 points. Euro zone stocks performed better, with the index of leading 50 shares (STOXX50E) up 0.3 percent, lifted by a 0.8 percent rise in bank stocks (SX7E).
MSCI's broadest index of Asia-Pacific shares outside Japan (MIAPJ0000PUS) fell 0.3 percent, near the day's lows and following Friday's 0.7 percent fall.
Japan's Nikkei closed (N225) 0.9 percent lower, hitting a 2-1/2 week low on concerns that a stronger yen would crimp corporate earnings.
Though U.S. stocks clawed their way to a higher close on Friday, major indices spent much of that day's session in negative territory, suggesting increased caution.
Yet it was the Dow's 11th consecutive record high on Friday, which is the longest such run since 1987.
In currencies, the dollar was flat on an index basis (DXY). The euro was up 0.2 percent at $1.0580
In addition to Trump's address to Congress, rates and the dollar will take their cue this week from Federal Reserve Chair Janet Yellen's speech on Friday.
"In order for the Fed to really have the option of hiking next month, Yellen will have to make a much stronger case relative to what's been said recently," Deutsche's Reid said.
In commodities, Brent crude (LCOc1) rose 1.15 percent to $56.62 per barrel while U.S. West Texas Intermediate (CLc1) was up 0.8 percent at $54.42 per barrel as a global supply glut appeared to ease.