The drop in French government bonds has accelerated this morning, pushing the premium investors demand to hold its bonds over Germany’s to the highest in three years, as the favourite for the country’s presidency is hit by a swirl of allegations over payments made to his family.
A measure of perceived riskiness between countries in the eurozone, the 10-year yield gap between the bloc’s two largest economies has swelled to 0.61 percentage points – the biggest gap since January 2014, though nothing like the scale seen in the darker points of the eurozone debt crisis (see chart above).
Eurozone sovereign bond prices are falling again today as the prospect of rising inflation has led investors to rejig their expectations of perpetually low central bank interest rates and bond-buying measures.
French bonds have come under notable pressure since late September as the country heads for a key presidential election in just two months time.
Right-wing candidate Francois Fillon – who had been favourite for the job – has been hit by a fresh wave of allegations over taxpayer payments made to his wife and children for allegedly fictitious jobs.
Le Canard Enchaîné, a satirical French weekly newspaper, reported yesterday that the former prime minister’s wife, Penelope Fillon, had been paid more than €800,000 in public funds from 1988 to 2002 for an alleged fake job as his parliamentary aide and assistant to the man who replaced him in parliament.
The scandal will embolden Mr Fillon’s rivals, including the far-right Marine le Pen who is promising to take France out of the eurozone within six months of being elected (more on that here).
Jitters are also being felt in the short-dated debt markets, with the yield gap on French and German two-year bonds spiking to their highest level since 2013.
“Since every step in this race brings new surprises, investors cannot afford to be complacent about the ultimate outcome in early May” said Geraud Charpin,Portfolio Manager at BlueBay Asset Management.
“The bond spread of France to Germany is bound to remain under pressure as we head into the campaign”, added Mr Charpin.
Read more: Europe’s bond yields get political