Prices for bonds sold by the Netherlands and France fell on Thursday, reversing early gains as Dutch voters rejected rightwing populism and opted for the status quo in an election regarded as a litmus test for Europe’s political future.
Dutch and French sovereign debt initially outperformed German Bunds as investors reacted to news that the anti-EU populist Geert Wilders’ PVV party had fallen short of expectations.
However, the market later dipped as investors switched their focus from politics to central bank policy and the rising odds of the European Central Bank removing stimulus earlier than expected.
The sell-off was exacerbated by a large auction of French government debt on Thursday. French 10-year bond yields, which moved lower in the morning as anxiety over eurozone political risks eased, rose 5 basis points to 1.08 per cent.
Mr Wilders campaigned on a contentious platform that included banning Muslim immigration and exiting the EU — positions that echo policies supported by the National Front in France, led by Marine Le Pen.
“To whatever extent this [Dutch] vote is a signal on France, the high turnout and rally around the mainstream centre look bad for [Ms Le Pen],” said Anna Stupnytska, global economist at Fidelity International.
The yield on benchmark 10-year German Bunds rose 3bp to 0.44 per cent, having earlier retreated from a 14-month high of 0.51 per cent on Tuesday. The Dutch 10-year bond yield was up 3bp to 0.68 per cent.
“Already markets have begun to take some signals from last night’s Dutch result that the electoral prospects of anti-EU populist parties may be checked,’’ said credit analysts at RBC Capital Markets.
However, other analysts questioned whether the Netherlands would prove an accurate barometer of elections elsewhere, pointing out that centre-right parties had gained support in part by adopting some of the themes promoted by far-right politicians.
Richard McGuire, head of rates strategy at Dutch bank Rabobank, rightly predicted that the relief shown in eurozone credit markets would be shortlived, pointing to mounting tension ahead of French presidential elections in April.
Fixed income markets had not priced in the Dutch elections as a big risk event, said Ken Orchard, portfolio manager of T Rowe Price’s international bond strategy.
“From a fixed income perspective, the focus is now on France. While the probability of a Le Pen victory remains slim, it is a major risk that the markets are wary of.”