French-German yield gap swells further

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It’s the spread that just keeps on giving.

The premium investors are demanding to hold France’s 10-year bonds over Germany’s swelled to a fresh post-eurozone crisis high earlier this morning as investors hone in on the country’s hotly-contested presidential election in less than three months’ time.

A measure of the perceived riskiness of French debt, the yield gap with the 10-year Bund hit 78 basis points (0.78 percentage points) today – the widest margin since November 2012 and inching up from yesterday’s close around 76 basis points.

French bonds have been under pressure since September, as investors have begun to price in the possibility of a shock election result after the Brexit vote and election of Donald Trump rocked pollsters last year.

Souring sentiment has helped push the French government’s borrowing costs from a record low of 0.1 per cent to over 1 per cent this week.

Yields have calmed a little this morning, slipping 3 basis points on 10-year French debt to 1.1 per cent.

France’s unpredictable presidential race has already thrown up a number of surprises, including incumbent Francois Hollande’s unprecedented decision not to stand for a second term, the initial surge in support for the right-wing former PM Francois Fillon and his subsequent fall from grace in a “fake” family jobs scandal this week.

The spectre of the far-right Marine Le Pen, who has vowed to take France out of eurozone should she win in May, also looms large over financial markets.

Ms Le Pen wants to pull France out of the single currency and redenominate the country’s more than €2tn debt pile – a decision the European Central Bank’s most senior French official has said would consign the country to “impoverishment”.

Bond markets seem to have taken little comfort in polls which suggest Ms Le Pen will lose out to potential contender Emmanuel Macron in a second-round run off.

“Polls have wrongly picked the winners of both socialist and republican primaries in France”, said Jane Foley at Rabobank, who thinks “the EU is likely to remain sensitive to French political news going forward”.

Mr Fillon meanwhile, who has dug his heels in and promised to stay in the race despite being engulfed in a payments scandal regarding his family, has shed 9 percentage points in polls since late last year.

With her main opponents with the exception of Mr Macron in disarray, “the only candidate confident of making it to the second round is Marine”, notes Kit Juckes at Société Générale.

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