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Japanese investors sold French government bonds for the third consecutive month at the start of the year, reflecting souring sentiment towards the country’s debt ahead of its presidential election next month.

The latest figures from the Ministry of Finance show Japanese money market managers sold ¥34.9bn ($0.3bn) of French debt in January. That is a significant slowdown from the ¥232bn dumped at the start of the year, but marks the first three-month selling streak since 2011.

Investors have dumped debt from the eurozone’s second largest economy as they begin to price in the increasing chances of Marine Le Pen triumphing in elections concluding in May. The far-right National Front leader has promised to hold a referendum on France’s eurozone membership and rip up the country’s EU budget rules, representing the biggest threat to the bloc’s established order in 60 years.

“Although the flow [of selling] was moderate there is a risk that it rises further in the run-up to the French election if the perceived risk of a Le Pen victory remains high,” said Elsa Lignos at RBC Capital Markets.

French bond yields have come under sustained pressure since the start of the year, with yields on 10-year debt hitting an 18-month high of 1.1 per cent last month (yields rise when a bond’s price falls).

The country’s debt is the worst performing major eurozone asset class this year, with benchmark yields up 32 basis points while German bunds have gained around 14bps.

Amid swirling political uncertainty, Japanese investors have taken comfort in German bonds instead, according to the MoF data. They snapped up ¥594.1bn of German debt last month – the highest net purchases since 2013 and topping off the biggest three-monthly cumulative rise in holdings since late 2014.

Japanese funds have also taken a dim view on US debt, reducing their Treasury holdings for the third month in a row in January by ¥1.49tn following a sharp ¥2.6tn drop in December.

Japan usurped China as the largest single foreign holder of US debt as of this year but its total Treasury holdings have fallen sharply after peaking last summer from $1,154tn in July to $1,090tn in December.

French yields have eased in the past week as polls show a widening lead for centrist Emmanuel Macron over Ms Le Pen in the final round run-off after rival François Fillon vowed to stay in the race despite an escalating embezzlement scandal.

Despite a widening in the polls between Mr Macron and Ms Le Pen, betting odds compiled by Betfair show a one in four chance of a far-right triumph in May.

Copyright The Financial Times Limited 2017. All rights reserved.
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