A milestone of sorts.
French and Irish 10-year bond yields have met at 1 per cent today, trading at broadly the same level for the first time since Ireland returned to international markets four years ago.
A former bailout country and once considered a part of the eurozone’s “periphery”, Ireland’s benchmark debt has rallied impressively over the last three years with yields falling back from a peak of over 4 per cent to record lows of below 0.4 per cent late last year.
French bonds meanwhile have been selling off sharply ahead of the country’s presidential election in just three months’ time.
France’s 10-year yields have jumped from 0.1 per cent in September to above 1 per cent this month, driving its yield gap with Germany to a four-year high in the last week.
Demand for bonds issued by the eurozone’s second largest economy has been hit by the scandal that has engulfed François Fillon, the centre right candidate who was widely seen as the frontrunner to win the upcoming presidential election.
Allegations that Mr Fillon’s wife was paid more than €800,000 in public funds for a fake job as parliamentary aide has blown the election campaign wide open for far-right candidate Marine Le Pen, who has promised to ditch the euro and redenominate the country’s debt should she triumph in May.
Both Irish and French have been caught up in a broader sovereign bond sell-off, with yields climbing off their record lows in the wake of Donald Trump’s election. Investors have been rejigging their expectations for rising inflation under the new White House administration which is bad news for bond returns.
France’s investment grade bonds are rated a few notches above Ireland’s among the main credit agencies, holding a AA status at S&P compared to Ireland’s A+.
But in a sure fire sign that Ireland has broken away from the eurozone’s peripheral economies, its bond yields have remained pretty restive compared to its bailout counterpart Portugal and perennially worrisome Italy.
Matthew Bailey, credit analyst at JPMorgan, notes the “sudden resurgence of European periphery risk” in the bond markets over the last six months (see chart below).
“Investors are worried that Europe will be the next domino to fall in a global trend towards isolationism, border controls, and trade tariffs during the current electoral cycle”.
After a year of unprecedented political shocks, investors are no longer discounting the prospect of a Le Pen triumph, Greek eurozone exit or election of the eurosceptic Five Star Movement in Italy, adds Mr Bayley,
“Any of these scenarios could return us to the bad old days of the eurozone crisis, when periphery premiums were 100-200 basis points”.
Bond spreads, which measure the difference in yields between member states measured against German Bunds, have also swelled ahead of an anticipated scale back in bond buying from the European Central Bank.
The ECB is planning to reduce its monthly QE target from €80bn to €60bn in April, with a view to exiting the programme in December at the very earliest.
Next month will mark the second anniversary of the central bank’s stimulus measures, which have given the ECB an over-sized presence in the eurozone sovereign bond markets after the bank snapped up more than €1.5tn of assets (read more here).
First chart via Bloomberg