French
bonds weaken as investors sound political alarm
Concerns
rise that presidential election will deliver another shock to
eurozone
YESTERDAY by: Elaine
Moore in London and Mary Childs in New York
Global investors are
turning their backs on French government bonds, reflecting alarm over
the capacity for next year’s presidential election to deliver
another shock to the eurozone and financial markets.
A pronounced drop in
French sovereign bond prices suggests they are being treated less
like those of a core European economy and more like securities issued
by the region’s least creditworthy countries.
The selling has
pushed the yield on France’s benchmark 10-year bonds up more than
60 basis points since the end of September to 0.8 per cent —
increasing the gap between French and German benchmarks by more than
10 basis points.
Meanwhile, the
difference between French bonds and those of Spain and Italy has
narrowed.
The widening spread
between French and German borrowing costs reflects divergent views on
the political threats facing Europe’s two largest economies, after
Angela Merkel, Germany’s chancellor, confirmed she would stand for
a fourth term next year.
Investors say that
although centre-right candidate François Fillon is favourite to
succeed François Hollande in France next spring, the UK’s vote for
Brexit and the US election of Donald Trump has forced them to take
Eurosceptic far-right politician Marine Le Pen’s chances more
seriously.
“It will be hard
for markets to shrug off the possibility that she will win —
regardless of what polls have to say,” said Mark Dowding, co-head
of investment grade debt at BlueBay Asset Management.
At a hedge fund
conference in New York last month, billionaire hedge fund manager
David Tepper recommended investors bet against French government
bonds.
Sources present said
the founder of the $19bn Appaloosa Management hedge fund described
the country as over-indebted relative to its neighbours and said its
10-year bonds remained expensive when compared with those sold by
Germany.
Capital has flowed
out of France for 14 of the past 23 months, while Germany has
recorded just two months of outflows in the past two years, according
to data compiled by Trading Economics.
Isabelle Mateos y
Lago, Paris-based global macro investment strategist in the BlackRock
Investment Institute, said the country’s bonds had traded in step
with Germany’s until the US presidential election.
“Foreign investors
appear to have started to look at the French election through the
prism of the US election and got frightened,” she said. “Are
those fears valid? In my view they are exaggerated . . . The
risk of a Le Pen victory is not zero so it makes sense for some risk
to be priced in but the current pricing seems excessive.”
The risk of a Le Pen
victory is not zero so it makes sense for some risk to be priced in
but the current pricing seems excessive
Isabelle Mateos y
Lago, BlackRock Investment Institute
European financial
markets are primed for political upheaval in 2017, with Dutch, French
and German national elections all due to be held.
Credit rating agency
Fitch has warned that further significant political shocks triggered
by electoral events in Europe could prove damaging for the European
project.
Although the
European Central Bank is still pumping money into the eurozone
economy via mass bond purchases, investors are beginning to pay more
attention to the individual risks in particular countries — leading
to greater divergence in borrowing costs around the eurozone.
“As long as the
ECB keeps buying bonds things are OK,” said Jonathan Baltora, bond
fund manager at AXA Fixed Income. “But as we move towards a
tapering it will be a much more stressful environment.”
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