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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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  • Andrew Allison

    It’s not Le Pen, who has almost no chance of winning, but Fillon who’s victory would “augur major changes for France: a historic slashing of its generous welfare state, a crackdown on immigration, restrictions on gay couples’ rights as parents, and tension between France and its NATO allies as the nation cozies up to Putin’s Russia on issues like Ukraine and Syria.” France is going to move right, the only question is, how far and how fast.

    • f1b0nacc1

      I wonder if you are right about Le Pen…I think that she has a better chance than most give her…

      • JR

        I think her chances increase a lot if there’s another major terrorist attack in France.

        • f1b0nacc1

          Absolutely, but I wonder if it will even take that much.

          Keep in mind that Le Pen, while certainly to the right of Fillon on immigration, etc., is a big supporter of the French state’s generous social model. In American terms, she is actually much more ‘blue’ than Fillon (who is a bit of a Thatcherite in many ways). I suspect (and certainly, I could be wrong) that Le Pen (who has managed to shake the bad rep of her father) will be able to appeal to those who are tired of the Socialists but do not want to go ‘the full Thatcher’ (you never go the full Thatcher!!)…

      • Andrew Allison

        She has a chance, but it’s small (this time). As in the regional elections, the left will vote with the center-right to shut her out in the second round. I don’t think a terrorist attack, which will be blamed on the policies of the socialists, will change this

        • f1b0nacc1

          You might be right, but I am not as sure as you are about this. She is not her father, who was regarding almost universally as unacceptable (think of him as a David Duke without the media savvy), and thus served as a rallying point for the French establishment. She might end up as an almost Trump-like figure, with a core following and the ability to peel off some of the more ambitious members of the political establishment who see her as a road forward for their own interests.

          Either way, we will see soon enough…

  • Fat_Man

    Like most explanations of market moves, this one is pure post hoc ergo propter hoc. Bond prices have been falling in the US also, is that because of Le Pen? or is it Trump? Of course as bond prices have fallen, equity prices have risen. Today was yet another DJI record (19,757). The real puzzle for financial math types is why is there negative correlation between the bond and equity markets, and what does that have to do with elections?

    • Anthony

      There’s plenty of post hoc, ergo proctor hoc around still and none has to do with elections or mathematicians and correlations. So what’s the salve?

      • Fat_Man

        All media explanations of market moves are wrong. Markets are driven by investor perceptions of the future.

        But, there are millions of market participants, and hundreds of financial journalists. Market participants are dispersed across the globe and occupy positions across all economic sectors. Financial journalists sit a few media centers and talk to each other. They are just making it up.

        What happened will only become clear much later. Even simple economic aggregates take months to be gathered and stabilized. “The owl of Minerva spreads its wings only with the falling of the dusk.” as Hegel wrote.

        • Anthony

          If only we could get the general public to understand such simplicity.

          • Fat_Man

            I think the general public is beginning to understand that fake news is everywhere.Remember when everyone thought that Walter Cronkite was the most trusted man in America. That era is gone.

          • Anthony

            Been gone long time (agreed) but does not justify making fake news acceptable. Hopefully, your acknowledgement of public getting it entails them also distinguishing “news” from “fake”.

          • Fat_Man

            It is hopeless. Men believe what they want to believe. Wisdom will only come after things are over. That is why we should study the eternal and the classical. Intellectual life in the West has committed suicide. The eternal and the classical are no longer taught.

          • Anthony

            Eternal and classical – On Seeing Clearly if I understand. Pass the gift on Fat_Man (My great grandmother said “build your house upon a rock” [the basic truths of life] and you will be a beacon of light to many). Happiness is a homemade article. Here’s to posterity (hope).

    • Andrew Allison

      Money moves between them in search of safety and yield.

    • Disappeared4x

      Bond prices usually drop when interest rates rise, or are expected to rise. But, when interest rates are at zero, too tempting to borrow to buy equities. In France, the high public debt ratio plus temporary electoral uncertainty is decreasing demand for government bonds. Both bond and equity markets detest Temporary Uncertainty. Applying the other rules to the post-2008 Eurozone is complicated.

      Fillon sure changes the electoral dynamics.

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