Le Pen threat sends French bond yields to the highest level

The prospect of a Marine Le Pen presidency scares investors in the French bond market as the far-right candidate approaches incumbent Emanuel Macron ahead of Sunday’s election, according to Bloomberg.

Investors have rejected French debt this week, pushing the cost of borrowing 10-year bonds to a seven-year high. Yields are on track for their fifth monthly rise, a string that has not been seen for more than a decade, showing market concern about the emerging exit from the extremely easing monetary policy in the euro area.

Polls suggest Macron is likely to face Le Pen in a run-off two weeks later after the first round of voting – which could prove extremely uncertain. The opposition candidate has cut Macron’s lead in recent weeks after moving away from anti-euro rhetoric and flirting with voters on promises to cut petrol prices and tax big energy companies. This has shaken bond traders, whose perception of French government debt risk – as measured by their German counterpart debt – has risen to a two-year high.

Le Pen “is more digestible for the markets this time around, as exiting the eurozone is not part of its campaign,” said Jordan Rochester, a strategic analyst at Nomura International Plc. “That’s where the good news ends.”

A Le Pen victory would send the euro lower and further widen bond spreads, Rochester said. Macron would beat Le Pen 51% to 49% in a run-off, according to an Elabe poll on pre-election polls released Friday.
Beyond Sunday’s election, a policy change for the European Central Bank is on the horizon. The ECB lifted its bond-buying net last month. The program amounts to 1.85 trillion. euro ($ 2 trillion), introduced in response to the coronavirus pandemic in March 2020, retained the cost of borrowing in the single currency area.

The minutes of last month’s meeting showed that some policymakers wanted to set an expiration date for a smaller asset purchase program, which runs from 2015. This would pave the way for a possible third-quarter rate hike to combat of euro area inflation, which is already almost four times the 2% target.

That said, the ECB is working on a backstop that will be available to the Governing Council to use to counter shock debt-induced debt market pressures beyond the control of individual governments, said officials familiar with the plans, who asked not to named because the matter is confidential.

Money markets are betting on interest rate hikes by a quarter of a unit in September and December, which will drive deposit rates to zero for the first time in eight years. Analysts surveyed by Bloomberg see the ECB making its first rate hike in more than a decade in December.

Lepen has described herself as a candidate for ordinary people, whom she calls “little ones”, and has turned her attention to tackling the cost-of-living crisis. But Eurosceptic comments from her past still cast a long shadow over investors.

“If Lepen does not swear allegiance to the euro, the risk is that her victory will create an anti-European climate and usher in a new era of uncertainty,” said Rishi Mishra, a Futures First analyst.

This could rekindle concerns about Italy’s debt ahead of next year’s general election in the country and revive memories of the 2018 vote, which gave way to a populist coalition that often clashed with the EU over fiscal restrictions.

At the time, Italy’s performance premiums – a key measure of risk in the region – were pushed to a five-year high, a level not seen since. Ahead of Sunday’s vote in France, Italian bond spreads jumped to a six-week high.
“Italian bonds may suffer more if they do win,” Mishra said.