Global investors are turning their backs on French government bonds, reflecting alarm over the capacity for next year’s presidential election to deliver another shock to the eurozone and financial markets.
A pronounced drop in French sovereign bond prices suggests they are being treated less like those of a core European economy and more like securities issued by the region’s least creditworthy countries.
The selling has pushed the yield on France’s benchmark 10-year bonds up more than 60 basis points since the end of September to 0.8 per cent — increasing the gap between French and German benchmarks by more than 10 basis points.
Meanwhile, the difference between French bonds and those of Spain and Italy has narrowed.
The widening spread between French and German borrowing costs reflects divergent views on the political threats facing Europe’s two largest economies, after Angela Merkel, Germany’s chancellor, confirmed she would stand for a fourth term next year.
Investors say that although centre-right candidate François Fillon is favourite to succeed François Hollande in France next spring, the UK’s vote for Brexit and the US election of Donald Trump has forced them to take Eurosceptic far-right politician Marine Le Pen’s chances more seriously.
“It will be hard for markets to shrug off the possibility that she will win — regardless of what polls have to say,” said Mark Dowding, co-head of investment grade debt at BlueBay Asset Management.
At a hedge fund conference in New York last month, billionaire hedge fund manager David Tepper recommended investors bet against French government bonds.
Sources present said the founder of the $19bn Appaloosa Management hedge fund described the country as over-indebted relative to its neighbours and said its 10-year bonds remained expensive when compared with those sold by Germany.
Capital has flowed out of France for 14 of the past 23 months, while Germany has recorded just two months of outflows in the past two years, according to data compiled by Trading Economics.
Isabelle Mateos y Lago, Paris-based global macro investment strategist in the BlackRock Investment Institute, said the country’s bonds had traded in step with Germany’s until the US presidential election.
“Foreign investors appear to have started to look at the French election through the prism of the US election and got frightened,” she said. “Are those fears valid? In my view they are exaggerated . . . The risk of a Le Pen victory is not zero so it makes sense for some risk to be priced in but the current pricing seems excessive.”
The risk of a Le Pen victory is not zero so it makes sense for some risk to be priced in but the current pricing seems excessive
European financial markets are primed for political upheaval in 2017, with Dutch, French and German national elections all due to be held.
Credit rating agency Fitch has warned that further significant political shocks triggered by electoral events in Europe could prove damaging for the European project.
Although the European Central Bank is still pumping money into the eurozone economy via mass bond purchases, investors are beginning to pay more attention to the individual risks in particular countries — leading to greater divergence in borrowing costs around the eurozone.
“As long as the ECB keeps buying bonds things are OK,” said Jonathan Baltora, bond fund manager at AXA Fixed Income. “But as we move towards a tapering it will be a much more stressful environment.”