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Political risk? What political risk?

A comprehensive regional election victory for Angela Merkel’s CDU, coupled with steadily tightening French election polls, has pushed the Franco-German bond spread to its lowest level in two months.

A measure of the riskiness of French over German debt and a barometer for the eurozone’s political stability, the spread had ballooned to its widest since the eurozone crisis last month as polls showed Marine Le Pen on course for a clear first round victory in the election which kicks off in four weeks.

France’s 10-year bond yield is outperforming its peers this morning, slipping 6 basis points, with Germany’s equivalent maturity Bund yield down 5bps.

The rally is being powered along by a cooling of the “Trumpflation” trade and helped push down the yield gap to 57 basis points after it spiked at a four-year high of 76bps.

Despite surging poll support for Germany’s new Socialist party leader Martin Schulz, his SDP party fell well short in regional elections in Saarland yesterday.

In a high turnout vote, an SDP-led coalition won 29.6 per cent of the vote – 1 point lower than its 2012 performance – losing out to the CDU’s 40.7 per cent.

Germany’s much-vaunted “Schulzzug” failed to materialise in one of German’s smallest states, with investors likely to have taken even more cheer in the disappointing performance for the anti-euro Alternative for Germany. The populist party gained 6.2 per cent of the Saarland vote, “a poor result compared to national polls and confirms the recent downtrend”, said Christian Schuz at Citi.

Weekend news from Germany follows a narrowing in the polls between France’s National Front – led by Marine Le Pen – and centrist candidate Emmanuel Macron. First round polls are now suggesting Mr Macron will narrowly edge out the FN leader before going on to a comprehensive victory in the final vote in May.

Copyright The Financial Times Limited 2017. All rights reserved.
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