French Bonds on the Defence ahead of Presidential Debate

The premium that investors demand to hold French instead of German debt rose to its highest in almost two weeks on Monday, reflecting unease among investors before the first televised debate in France’s turbulent presidential race.

Across the euro zone, government bond yields edged higher as a perception that the European Central Bank may be preparing to scale back its ultra-easy monetary policy dented appetite for fixed income.

But French bonds underperformed most of their peers.

French voters go the polls on April 23 and May 7 in the two-round election, which is being closely followed outside France as another test of popular discontent with traditional parties and institutions such as the European Union.

A poll released on Sunday showed independent centrist Emmanuel Macron would lead first-round voting with 26.5 percent, just ahead of far-right leader Marine Le Pen on 26 percent, before beating her 64-36 in the run-off.

Monday’s televised debate is also seen as an opportunity for scandal-hit conservative candidate Francois Fillon to get back in contention.

“A tired cliché is to say that such debates only confirm voters’ intention rather than convince them to shift from one candidate to another,” said Mizuho rates strategist Antoine Bouvet.

“We think the importance of this debate should not be underestimated. Only 60 percent of voters polled by Ifop say they have made up their mind.”

France’s 10-year government bond yield rose 2 basis points to 1.12 percent, not far off multi-month highs hit in February.

And with benchmark 10-year German Bund yields up just 1 bps at 0.44 percent, the gap between French and German bond yields widened to about 68 bps — its widest in almost two weeks.

Most other euro zone yields were about 1 bps higher, with the outlook for ECB monetary policy the other key focus for investors.

ECB policymaker policy maker Ignazio Visco was reported saying the central bank could step away from its pledge to keep interest rate low after ending quantitative easing.

Comments from the ECB’s Ewald Nowotny suggesting rates could rise before the end of bond-buying stimulus triggered a sharp sell-off at the end of last week.

“We haven’t see a consistent message from ECB Governing Council members on this,” said DZ Bank strategist Andy Cossor. “So we are waiting for more speeches from ECB heavyweights to see how the thinking is developing.”


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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell