French bond yield gap falls back down to earth

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Adieu, French yield spread watching.

France’s 10-year yield gap with German Bunds has plummeted right back down to earth in the wake of the country’s first round presidential vote.

A traditional measure of bond market stress over the country’s unpredictable election race, the spread had blown out to the highest since the eurozone crisis at near 80 basis points (0.8 percentage points) two weeks before the first round vote.

But with polls suggesting the pro-EU, market friendly, centrist Emmanuel Macron will emerge as comfortable winner over the far-right Marine Le Pen in the final run off, bondholders have begun snapping up French assets once again.

Investors are now demanding around a 40bps premium to hold French over German debt, close to the average of 30bps seen for most of the last 12 months before election nerves stung bond markets.

The two-year bond spread has also narrowed sharply, down from over a recent pre-election peak of 52bps to 27bps this morning.

Despite analysts warning of the difficulties facing Mr Macron as he seeks to build a parliamentary majority to get through his reform of France’s labour market or tax laws, French bond yields are likely to remain subdued as the European Central Bank keeps snapping up eurozone debt.

France’s benchmark 10-year bond yield has gained 1 basis point this morning, while equivalent German Bund yields are up 3bps.

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