French bonds add to election gains as markets say “Au revoir, Marine”

French bond markets on Tuesday added to the gains they made immediately after the first round of France’s presidential election, which analysts said showed that investors saw little risk of anti-euro Marine Le Pen scoring a surprising victory in the final vote.

Far-right Le Pen is lagging the favourite, centrist Emmanuel Macron, by around 20 points in opinion polls before their run-off on May 7, with rival lawmakers urging their supporters to back Macron.

French 10-year government bond yields dipped further on Tuesday, remaining near their lowest of the year, and the gap between the French and German equivalents was its smallest since early November.

“Markets turn the page on Le Pen risks already,” Commerzbank strategist Rainer Guntermann, said in a note titled “Au revoir Marine”.

In what appeared to be an attempt to broaden her appeal to voters ahead of the final round, Le Pen said late on Monday she was taking “a leave of absence” from leading the National Front party (FN).

But two defeated candidates – conservative Francois Fillon and Socialist Benoit Hamon – did not even wait for Sunday’s final count to urge their supporters to rally behind Macron.

France’s outgoing president, Francois Hollande, as well as Prime Minister Bernard Cazeneuve and former prime minister Manuel Valls have also backed Macron.

The far left’s Jean-Luc Melenchon, who got 19.64 percent on Sunday, has so far refused to say who he will back in the run-off. He has been a fervent opponent of Le Pen for years, but her anti-establishment, anti-globalisation chord could resonate with some of his voters.

French 10-year yields dipped 1 basis point to a new 3 1/2-month low of 0.746 percent on Tuesday, slightly below the 0.756 percent level hit Monday after a 10 bps fall.

The gap between French and German equivalents, known as the spread, dropped to around 41 basis points, its lowest since early November.

Strategists at ING said some political risk was baked into the spread before the final vote, which they calculate at around 10 basis points.

Other low-rated euro zone bonds considered most vulnerable to heightened political risks in the European Union held on to gains seen on Monday.

“On paper, the result of the final round of the French election now looks to be a foregone conclusion,” said David Zahn, head of European fixed income at Franklin Templeton. “But if we’ve learned anything from recent political events, it’s to expect the unexpected.”


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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