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…and the bond markets are go!

French 10-year bond yields have tumbled an impressive 11 basis points (0.11 percentage points) this morning – their best daily rally in over four months – as investors snap up the country’s debt after an expected turnout in its first round presidential election.

Yesterday’s vote saw Emmanuel Macron gain the largest overall vote share with around a quarter of electorate plumping for the centrist candidate who supports France’s EU membership, immigration and globalisation.

His expected triumph in the second round vote in early May has driven French bond prices higher, with yields down to the lowest since January at 0.82 per cent and cooled investor demand for German Bunds. Benchmark 10-year German bond yields are up over 6bps this morning to 0.34 per cent – a nearly monthly high.

“The nightmare scenario for markets of a Marine Le Pen and Jean-Luc Mélenchon run-off has been avoided”, said Nick Kounis at ABN Amro who dubbed Mr Macron’s agenda as the most market friendly of the main candidates.

“He has pledged to pursue labour market reforms and cut excessive public spending, while he is also a pro-European”.

In the run up to the vote, the eurozone bond market had become a major gauge for market stress over the outcome of France’s most unpredictable election in its post-war history.

The premium investors demanded to hold French over German debt spiked to its highest since the eurozone crisis only three weeks ago as polls showed the four-horse race was wide open.

The election pitted two eurosceptic far left and far right candidates against Mr Macron and his more pro-European leaning Republican rival Francois Fillon.

A measure of the perceived riskiness of French bonds, the yield gap with Bunds was driven to a 2012-high of 80bps in February but has now receded sharply down to 51bps. Its average before the election spooks was around 30 bps.

Francois Cabau, economist at Barclays, noted the result “highlights the upset but also the fragmentation of the French political landscape with neither of the two historical establishment parties represented in the second round, but with four political forces almost equally distributed gathering 80 per cent of the votes.”

With Mr Macron’s victory all but assured in the second round, investors attentions will soon turn to France’s parliamentary elections in June, where the new president will be battling to secure a parliamentary majority despite lacking any formal party structure.

“Even presidents with the best intentions have struggled to pass reforms in France. They have been blocked by vested interests, street protests and strikes in the past”, warned Mr Kounis.

Charts via Bloomberg

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