French government bond yields edged higher on Monday while spreads with their German peers tightened after French leader Emmanuel Macron led following the first round of the presidential election.
With 96% of the votes counted for Sunday's first round, Macron had 27.41% of the votes and far-right challenger Marine Le Pen had 24.03%.
While Le Pen no longer advocates ditching the euro, markets are uneasy about her agenda of protectionism, tax cuts and nationalisation, which could mean less European integration.
“The market is probably a bit complacent about French election risks,” said David Riley, chief investment strategist at BlueBay Asset Management.
“At some point in the next couple of weeks, the German-French yield spread might widen significantly up to 85 bps if polls suggest a close call for the run-off,” he added. “Now it is pricing in a Macron victory.”
Ifop pollsters predicted a very tight runoff vote on April 24, with 51% for Macron and 49% Le Pen. Other pollsters offered a slightly bigger margin in favour of Macron, with up to 54%. But that was, in any case, much narrower than in 2017, when Macron beat Le Pen with 66.1% of the votes.
“We see a French-German spread at 70-80 bps if polls should suggest Le Pen could win the election and a potential further widening if that happens,” said Yannick Lopez, head of fixed income at OFI Asset Management.
“The spread will stay probably at around 50 bps on expectations that Macron will remain president, with a further tightening below 40 bps if he should win the run-off,” he added.
France's government bond yield rose 1 bps to 1.28%, after briefly hitting its highest since July 2015 at 1.309%. The French-German 10-year yield spread tightened 5.5 bps to 49.
Sunday's vote “makes it more likely that the outcome of the subsequent legislative election forces France to be governed by a fragile coalition,” Citi analysts said in a note to clients.
Investors also focused on the European Central Bank policy meeting due on Thursday while watching for moves in U.S. Treasuries ahead of US inflation data.
Money markets price in 70 basis points of ECB rate hikes by the end of this year, compared with 65 bps priced in on Friday.
Germany's 10-year government bond yield, the benchmark of the bloc, rose around 8 bps to its highest since February 2018 at 0.798%.
“I think the Bund 10-year yield is keen on reaching its terminal rate, which is around 1%,” Ofi's Lopez added, mentioning as a trigger “incredibly hawkish” tones from the Fed.
US 10-year Treasury yield rose 4.5 bps to 2.76% on Monday as traders positioned for higher inflation readings and an increasingly hawkish Federal Reserve policy outlook.
Reuters
French-German yield spread tightens after Macron leads in first round
Image: REUTERS/Yves Herman
French government bond yields edged higher on Monday while spreads with their German peers tightened after French leader Emmanuel Macron led following the first round of the presidential election.
With 96% of the votes counted for Sunday's first round, Macron had 27.41% of the votes and far-right challenger Marine Le Pen had 24.03%.
While Le Pen no longer advocates ditching the euro, markets are uneasy about her agenda of protectionism, tax cuts and nationalisation, which could mean less European integration.
“The market is probably a bit complacent about French election risks,” said David Riley, chief investment strategist at BlueBay Asset Management.
“At some point in the next couple of weeks, the German-French yield spread might widen significantly up to 85 bps if polls suggest a close call for the run-off,” he added. “Now it is pricing in a Macron victory.”
Ifop pollsters predicted a very tight runoff vote on April 24, with 51% for Macron and 49% Le Pen. Other pollsters offered a slightly bigger margin in favour of Macron, with up to 54%. But that was, in any case, much narrower than in 2017, when Macron beat Le Pen with 66.1% of the votes.
“We see a French-German spread at 70-80 bps if polls should suggest Le Pen could win the election and a potential further widening if that happens,” said Yannick Lopez, head of fixed income at OFI Asset Management.
“The spread will stay probably at around 50 bps on expectations that Macron will remain president, with a further tightening below 40 bps if he should win the run-off,” he added.
France's government bond yield rose 1 bps to 1.28%, after briefly hitting its highest since July 2015 at 1.309%. The French-German 10-year yield spread tightened 5.5 bps to 49.
Sunday's vote “makes it more likely that the outcome of the subsequent legislative election forces France to be governed by a fragile coalition,” Citi analysts said in a note to clients.
Investors also focused on the European Central Bank policy meeting due on Thursday while watching for moves in U.S. Treasuries ahead of US inflation data.
Money markets price in 70 basis points of ECB rate hikes by the end of this year, compared with 65 bps priced in on Friday.
Germany's 10-year government bond yield, the benchmark of the bloc, rose around 8 bps to its highest since February 2018 at 0.798%.
“I think the Bund 10-year yield is keen on reaching its terminal rate, which is around 1%,” Ofi's Lopez added, mentioning as a trigger “incredibly hawkish” tones from the Fed.
US 10-year Treasury yield rose 4.5 bps to 2.76% on Monday as traders positioned for higher inflation readings and an increasingly hawkish Federal Reserve policy outlook.
Reuters
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