Eurozone bond rally fades as investors turn to French elections

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Investors are selling eurozone government debt this morning, putting an end to a brief rally sparked by the Dutch election result, as markets turn their attention to France’s upcoming vote and hone in on talk of a possible ECB interest rate rise.

French bonds are the worst performing in Europe this morning, with 10-year yields climbing 4 basis points (0.04 percentage points) while German 10-year Bunds and their Dutch equivalents are up 3bps.

Dutch bonds were given an initial boost in the aftermath of the country’s general election where anti-Islam populist Geert Wilders failed to make major inroads and liberal and left-wing parties made gains.

The ruling centre-right VVD party of Mark Rutte lost seats but was still the largest party and will be in pole position to head up a new coalition.

As the first of three major elections in the eurozone this year, events in the Netherlands had been seen as a bellwether for populist anti-EU sentiment. But the relief rally has proven short-lived as investors nervously eye elections in France – the eurozone’s second largest member state – where National Front leader Marine Le Pen is still leading first round polls (see the FT’s election tracker here).

Like Mr Wilders, Ms Le Pen is campaigning for a eurozone exit and a ban on all immigration. French bond prices have also been pushed down by a fresh debt auction yesterday (yields rise when a bond’s price falls).

“Investors should by no means conclude that the Dutch vote sounds the all clear in terms of the populist threat to EU and eurozone unity”, said Lyn Graham-Taylor at Rabobank who notes the election’s rightward shift on issues such as immigration.

Compared to the Netherlands, France has suffered under higher unemployment and weaker growth, suggesting “a much greater risk that the French will lean rightward politically in the imminent presidential poll but leftward economically”, said Mr Graham-Taylor.

Demand for bonds is also slipping in the aftermath of comments from ECB board member Ewald Nowotny that the central bank could begin raising its deposit rate (currently at -0.4 per cent) before its key lending rate (at 0 per cent).

“The structure of the interest rates does not always need to remain constant. The ECB could also raise the deposit rate earlier than the prime rate” said Mr Nowotny.

Read more: What’s next for the Dutch economy?

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