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French bond selling eases after Macron boost

Selling pressure on French bonds ebbed on Thursday, pushing the yield on the 10-year bond back below 1 per cent, as the prospect of a centrist alliance in the country’s presidential election eased anxiety that far-right candidate Marine Le Pen will win.

The decision on Wednesday by independent candidate François Bayrou not to stand in the country’s elections, and instead throw his support behind fellow centrist Emmanuel Macron, has helped French bonds snap a three-day losing streak.

France’s sovereign bonds market is proving a barometer on the election, which will see voters go to the polls on April 23 and May 7. Late on Thursday, French 10-year bond yields were down around 4 basis points to 0.97 per cent.

The spread over the German 10-year yield — a measure of the premium investors are demanding to hold French debt — has eased from this week’s post-eurozone crisis highs.

“It is increasingly debatable, above all in bond/credit market terms, whether there is another story in financial markets other than the French elections and related market fears,” noted Marc Ostwald, a strategist at Admisi.

Mr Bayrou, once considered the “third man” of French politics, has chosen to back the former Socialist economy minister, who is polling in joint second place with François Fillon and behind Ms Le Pen.

“The fragmentation of the electorate is such that a presidential bid would only increase the perils [facing France],” Mr Bayrou said, as he vowed to block Ms Le Pen’s road to the Élysée Palace in May.

France’s election is arguably the biggest source of political risk facing the eurozone this year, and comes as data on growth and inflation begin to show signs of improvement.

Derek Halpenny, head of European research at MUFG, pointed to market complacency regarding the risk of a shock electoral victory for anti-euro candidate Marine Le Pen.

“You make the obvious comparisons with last year — there was very compelling evidence that markets weren’t willing to price in the risk,” he said.

The two-year German Shatz yield fell to a record low of minus 93 basis points on Thursday, with buying reflecting investors seeking to hedge against a le Pen victory. The ECB’s recent move to begin buying bonds yielding below the deposit rate of minus 0.4 per cent has also supported short-dated paper.

Mr Halpenny said that appetite for short-dated German paper depends in part on investor willingness to tolerate negative yields. “If you are in a true risk-aversion climate, it’s more about your capital than your yield,” he said.

Jittery markets are taking comfort in the news, having already been stung by the Brexit vote and Donald Trump’s election last year.

“Though the polls continue to suggest that a Le Pen victory is unlikely in the second, decisive round, the tone throughout yesterday’s session was clear in that the market does not wish to be proven incorrect, yet again,” said Lyn Graham-Taylor at Rabobank.

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