Frexit Watch
Le Pen Scare Makes French Bonds Lose Their Luster

After a year of political turbulence, the markets are spooked by the prospect of a Marine Le Pen presidency, and the scare is hitting France’s typically solid government bonds. FT:

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.

According to investors, current polls showing François Fillon leading the race for France’s presidency offer little comfort to those who fear that the Euroskeptic Le Pen could pull off a victory and call for a “Frexit”:

“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.   

To be fair, Le Pen is not exclusively to blame for France’s bond troubles. Some analysts point to wider economic issues, including France’s over-indebtedness compared to its neighbors and its ongoing capital flight. But the fall in bond prices has been clearly correlated with the U.S. election, as French bonds have ceased trading in step with their German counterparts since Trump’s surprise win.

The French scare offers further proof (if it were needed) that all is not well in the Eurozone. After the shocks of Brexit, Trump and other populist victories throughout the continent, nothing is certain in the EU anymore, including the future of its second largest member. The fact that French bonds are now approaching risk levels typically associated with Spain or Italy is a testament to France’s own economic weaknesses, but it is also a vote of no confidence in the EU’s ability to hang on to its members. Investors appear to be taking the prospect of a Le Pen victory quite seriously. Berlin and Brussels would be wise to do the same.

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