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The Franco-German divergence continues apace.
France’s short-term yield spread with Germany has hit a new post-eurozone crisis high today as the country’s bonds come under politically-induced pressure while Germany’s two-year bond prices hit record highs.
The yield gap between French and German two-year bonds reached 0.44 percentage points today – swelling to the highest level since early 2012 and following in the wake of its 10-year counterpart.
It comes as Germany’s “schatz” yields hit a record low today, with demand for the “ultra safe” debt rallying strongly after new data show the paper is being snapped up as part of the European Central Bank’s quantitative easing measures.
Meanwhile, persistent jitters about the prospect of a Marine Le Pen presidential victory has sent French two-year yields up around 6 basis points today to -0.45 per cent. The equivalent maturity German debt is trading at a record low around -0.872 per cent.
Negative yields on both sets of paper mean investors are guaranteed to make a loss should they hold the bonds to maturity.
Investors have been demanding a steadily rising premium to hold France’s debt over Germany’s, spooked by the prospect of another major populist electoral victory later this year in the form of the far-right Ms Le Pen.
The Front National leader is promising to hold a referendum to take France out of the eurozone – a move that would constitute the biggest threat to the EU’s established order in 60 years.
Polls indicate Ms Le Pen will triumph in the first round vote but lose out to whomever she faces in the second round. But her margin of defeat looks to be slimming, with a poll from Opinionway released yesterday giving her opponent Emmanuel Macron a 16 point lead in the May vote – falling from 20 points in just four days.
Richard McGuire at Rabobank warned that with investors still reeling from the Brexit vote and election of Donald Trump, this margin was “not too far away from this historical benchmark of historical “wrongness” and, indeed, too close for comfort if one were to worry over a possible leak of compromising material on Macron following the first round of voting.”
The ECB’s stimulus measures meanwhile have sent German debt on a bumper rally. Late last year, the central bank announced it was dropping a -0.4 per cent yield ceiling on its government debt purchases – allowing national central banks to snap up paper below the deposit rate.
Germany’s Bundesbank has just done that, with latest data showing it is the biggest beneficiary of the tweak which will allow the ECB to continue hitting its €80bn a month purchase target.
Second chart via Bloomberg