Le Pen poll lead pushes Franco-German yield gap to new 2012 high

Here we go again.

The premium investors are demanding to hold French over German 10-year debt has hit a fresh post-eurozone crisis high today – exceeding 0.81 percentage points for the first time since August 2012.

The yield gap has swollen to its highest in over four years this month, reflecting investor jitters about France’s upcoming and unpredictable presidential elections in three months’ time.

France’s 10-year bond yield – which reflects the government’s borrowing costs – leapt 7 basis points today to 1.1 per cent after latest polls show the far-right Marine Le Pen is on course to emerge as a clear winner in the first round vote held in late April.

Ms Le Pen, who has promised to hold a referendum on France’s eurozone membership, is polling at 27 per cent in the first round vote, with her two main rivals, Francois Fillon and Emmanuel Macron tied at 20 per cent, according to latest collated polls from Opinionlab.

The prospect of a Le Pen presidency has spooked French bond investors with markets warily eyeing the apparent demise of her biggest rival, the right-wing Mr Fillon.

Mr Fillon’s refusal to back out of the race following a family payments scandal, coupled with maneuvering in the Left, mean Ms Le Pen is likely to be the only candidate guaranteed in the second round run-off, notes Charles Lichfield at Eurasia group.

“A Front National candidate has never before been expected to feature in the second round, let alone come first by some distance”, said Mr Lichfield, adding:

Macron’s chances of making it into the second-round runoff are lower than current polls might suggest—and probably just slightly higher than Fillon’s.

Investor demand for French bonds also tailed off last week after country’s two main left-wing candidates for president were reportedly mulling over an alliance.

Benoît Hamon, candidate for the ruling Socialist party, told French radio on Friday he had opened talks with the far-left Jean-Luc Mélenchon about running on a shared platform in April’s elections.

Still, polls indicate Ms Le Pen would emerge as a loser whoever her opponent in a second round run off between Mr Fillon or Mr Macron by a margin of 56 per cent and 58 per cent respectively.

Meanwhile, Germany’s short-dated two year yields have plumbed to a fresh record low of -0.85 per cent today – rallying strongly after latest data show they are being snapped up as part of the European Central Bank’s bond-buying measures (see chart below).

The ECB dropped its restriction on purchasing government debt yielding below its -0.4 per cent deposit rate earlier this year, allowing the Bundesbank to buy up the short-dated paper in order to hit its monthly QE targets.