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Le Pen poll lead hits Franco-German bond spread

Rising angst over the outcome of France’s presidential election sent the premium investors are demanding to own French debt instead of German bonds to a new post-eurozone crisis high.

The gap between the yield on 10-year French debt and German equivalent bonds exceeded 0.81 percentage points for the first time since August 2012, as a fresh poll showing far right candidate Marine Le Pen is on course to emerge as a clear winner in the first round vote to be held in late April.

Daily trading volumes in French bonds is at its highest since the crisis that gripped the eurozone in 2010 to 2012, as the possibility of Ms Le Pen, whose National Front party has pledged to pull the country from the euro, spooks some investors.

Ms Le Pen is polling at 27 per cent in the first round vote, with her two main rivals, François Fillon and Emmanuel Macron tied at 20 per cent, according to latest collated polls from OpinionLab.

The yield on France’s bond yield, which reflects the government’s benchmark borrowing costs, jumped as much as 7 basis points to 1.13 per cent before retreating. Yields move in the opposite direction to prices.

Markets are warily eyeing the struggle of Ms Le Pen’s biggest rival, the rightwing Mr Fillon. Didier Saint Georges, a managing director at fund manager Carmignac, cautioned that investors should be braced for more volatility in the countdown to the election.

“The complexity and fluidity of the local political situation make it impossible for markets to price risks today with any relevance,” said Mr Saint Georges. “There are still many undecided voters, and the impact on them of past and future mudslinging between candidates is likely to maintain a high level of uncertainty until April 23.”

Given both UK and US voters delivered political surprises with the votes for Brexit and Donald Trump respectively, investors are paying particularly close attention to the fight for the French presidency even though polls indicate Ms Le Pen would lose whoever her opponent would be in a second round run-off.

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

Meanwhile, Germany’s short-dated two-year yields reached a fresh record low of minus 0.85 per cent on Monday, rallying strongly after latest data show they are being snapped up as part of the European Central Bank’s bond-buying measures.

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

The move extended to gap between short-dated French and German two-year bonds to the widest point since May 2012 at 0.42 percentage points.

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