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French debt is under-performing its major European rivals this morning as markets return from the Easter break to hone in the country’s first round presidential vote on Sunday.

Investor demand for France’s 10-year bonds has dipped in the first session of European trading after the long weekend, with yields up 2 basis points (0.02 percentage points) while equivalent maturity German yields are down 1bp (yields rise when a bond’s price falls).

French benchmark and two-year debt has become a gauge of market sentiment over the country’s most unpredictable election race in years.

With far-right candidate Marine Le Pen having held a slim lead in the first round vote, bondholders are now demanding a steadily rising premium to keep hold of French bonds following a recent surge in poll support for far-left veteran Jean-Luc Mélenchon.
Analysts are expecting more market volatility this week as the previous two-horse race between centrist Mr Macron and Ms Le Pen has been blown open with four candidates fighting for a place in the second round.

The FT’s poll of polls has Mr Mélenchon on 19 per cent, just behind Ms Le Pen and Mr Macron who are both tied at 23 per cent. Should no contender win a majority this weekend, the top two candidates will contest the second round run-off in early May.

France’s 10-year bond spread with Germany has now widened to close to the four-year highs hit earlier this year at 74 basis points (0.74 percentage points) rising from as low as 57bps three weeks ago, before Mr Mélenchon’s jump in the polls.

Like his extreme right counterpart in the National Front, the firebrand ex-Socialist has called for a fundamental change in France’s relationship with the EU but has not gone as far as to support an outright eurozone exit.

Reflecting concerns over short-run political stability, France’s two-year bond premium has swelled to its widest since the height of the eurozone crisis, while volatility in the euro has leapt to its highest since just before the Brexit vote.

“There’s a clear sense of pre-election nervousness as we enter the final days of first-round voting” said Kit Juckes at Societe Generale.

Still, second round voting intentions have Mr Macron, a former economy minister under the current Socialist government, emerging comfortable winner in the race for the Élysée Palace.

The polling should help put a lid on French yields said Richard McGuire at Rabobank who thinks there are “a chunk of investors who will look to get long prior to the first round election result rather than waiting for confirmation that polls have been painting an accurate picture”.

The euro is trading broadly flat against the dollar at $1.0649.

First chart via Bloomberg

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