The “Le Pen effect”?

France’s 10-year yield gap with Germany has hit near four year high after the country’s far-right contender for the presidency laid out her plans for the job top in the eurozone’s second largest economy.

Launching her campaign for the Elysee in Lyon yesterday, Marine Le Pen promised to halt the forces of globalisation, pull France out of the eurozone, and end “uncontrolled immigration” three months ahead of the country’s key election.

An unpredictable election campaign has seen investors demand a steadily rising premium for holding French debt over Germany’s – considered the safest asset class in the eurozone – with 10-year yields climbing from record lows of 0.1 per cent in September to above 1 per cent since January.

A measure of the perceived riskiness of French debt, the bond spread between the eurozone’s two largest economies is now at 0.72 per cent – the highest since March 2013 (yields rise when a bond’s price falls).

The dumping of French debt has accelerated in the last two weeks after the erstwhile favourite for the presidency – former right-wing PM Francois Fillon – has become embroiled in a scandal over taxpayer funds to his family members.

There is now growing pressure on Mr Fillon to formally withdraw his candidacy and allow his Les Republicans party to nominate a new hopeful.

Mr Fillon’s apparent demise will be a boon for his critics, notably Ms Le Pen, who is promising to withdraw France from the single currency within six months of taking office.

Her vow to redenominate France’s outstanding debt into a new franc would lead to a certain downgrade of the country’s sovereign borrower status, according to Moritz Kraemer, chief ratings officer at S&P Ratings.

But latest polling still suggests the National Front leader would lose out in a second round run-off to centrist candidate Emmanuel Macron, whose surging popularity has caught observers by surprise in a remarkably unpredictable presidential race.

Mr Macron has said Ms Le Pen is “betraying” the French people, promising instead to strengthen the euro’s foundations and revive the Franco-German alliance after the Brexit vote.

Polls however “remain very volatile and uncertainty remains high”, warned Philippe Gudin at Barclays.

France’s benchmark yields are up another 4 basis points this morning to 1.11 per cent while Germany’s have slipped 1.2bps after latest figures showed industrial orders rose by their best pace since 2011 at the end of last year.

Julien Manceaux at ING struck a more optimistic tone on the long-term prospects for France’s sluggish economy.

“Whoever wins the presidential election, the mandate for reforms will be very strong, which could lead to a French economic revival in the coming years and lead to higher GDP growth already in 2018, for which we expect 1.8 per cent”, he said.

“In the meantime, uncertainty will continue to worry bond markets”.

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