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A key measure of French bond market stress has fallen back in the wake of the country’s first major presidential debate – a testy three-hour affair where no candidate emerged as a clear winner.

Dominated by talk of Islam and the economy, the debate was contested by far-right Marine Le Pen, independent centrist Emmanuel Macron, Republican François Fillon, Socialist Benoît Hamon and the far-left Jean-Luc Mélenchon (read the FT’s verdict here).

French bonds seem to be cheering on the fallout as leading candidate Mr Macron seems to have emerged as a slim winner from last night’s events according to post-poll response from Elabe.

The country’s 10-year benchmark yield dropped as much as 0.03 percentage points this morning to 1.07 per cent (yields fall when prices rise), with the spread with Bunds also slipping back to 0.62 percentage points after hitting a four-year high of 0.90 points at the start of February.

“The narrow lead Macron has managed to forge over Le Pen was always going to make him a target. But he seems to have impressed” said Patrick O’Donnell, investment manager at Aberdeen Asset Management.

Still Richard McGuire at Rabobank warns against reading too much into the first debate:

There is reason to take a circumspect view of what this debate means for the actual election result as agreeing that a particular candidate was a convincing speaker does not necessarily mean that this candidate will receive your vote.

France’s first round vote kicks off in late April before a final run off in early May. Polls indicate Ms Le Pen – who is planning to hold a referendum on France’s eurozone membership within six months of taking office – will be comfortably defeated by Mr Macron in May by a margin of 65 per cent against 35 per cent.

Financial markets have been pricing in the probability of a Ms Le Pen triumph this year after her main conservative rival Mr Fillon was engulfed in an embezzlement scandal, helping keep France’s 10-year bond yields elevated above 1 per cent for the last four months.

But with the vote just a month away and polls still showing a defeat for the Front National, the euro has climbed to a six-week high against and bond markets have calmed in recent weeks.

But even if Ms Le Pen emerges as a surprise winner, her attempt to take France out of the single currency after 18 years of membership would face a number of roadblocks. Holding the vote would require a change to the country’s constitution – a move that would require a parliamentary majority to pass. France will hold parliamentary elections in June.

“The two-round legislative elections will probably drive voters towards more mainstream candidates in the overwhelming majority of France’s 577 constituencies” said Mujtaba Rahman at Eurasia group.

“As such, the FN vote is only likely to surpass the number of anti-FN voters in areas where the FN is most entrenched: The North, the South West and some of the East. This means there is a maximum of 90 or so seats the FN will likely be able to win”, said Mr Rahman.

Copyright The Financial Times Limited 2017. All rights reserved.
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