France’s First Bond Sale Since Vote Called Goes as Planned

(Bloomberg) -- France’s first bond sale since President Emmanuel Macron last week called a snap election was met with solid demand, a sign the political uncertainty is not deterring new buyers.

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The Treasury in Paris raised €10.5 billion ($11.3 billion) through auctions of three- to eight-year bonds on Thursday, matching the upper end of their target. Bids across all four sales were 2.41 times the total amount sold — broadly in line with the 2.63 times and 2.37 times seen at the previous two sales of similar maturities.

Investors had been homing in on the results to see whether yields are near levels that will attract fresh money after one of the most brutal French market routs in decades. Funds including Candriam and BlueBay Asset Management said this week they’re steering clear of the securities, noting they remain vulnerable to further losses as the country heads to the polls.

“Not as bad as I expected. No major stress from the auction results,” said Evelyne Gomez-Liechti, strategist at Mizuho International. “That said, I would still be careful about French bonds given how close we are to the first voting round.”

Traders are worried that shoring up the nation’s stretched public finances will become harder if Macron’s party — which is trailing Marine Le Pen’s far-right National Rally in opinion polls — loses ground in parliament. On Wednesday, the European Commission reprimanded the nation for running a budget shortfall of 5.5%, a level that far exceeds the bloc’s 3% limit.

The yield on 10-year notes remained two basis points higher at 3.22% after the results. The extra yield investors demand to hold French debt was steady at around 79 basis points on Thursday, the most since 2017. The spread has widened more than 30 basis points over the past 10 days.

French bond sales have ranged between €12 billion and €13 billion this year. But at the height of the market meltdown last week, the Treasury announced a more modest target for Thursday’s auctions, which may have supported the offering.

National debt agencies often keep scorecards on the various ways dealers — who are required to bid — engage with the market during auctions. The best are rewarded juicy fees to handle syndicated bond sales.

“Dealers are incentivized to put in a strong showing to make sure the sale goes well,” Lyn Graham-Taylor, a senior rates strategist at Rabobank said Wednesday.

Earlier this week, Vanguard said the rout will eventually create a buying opportunity, but bond spreads have widen further to lure them back in. For Candriam, a sustained drop in bonds could lead the nation down a path to full scale financial crisis, while UBS Asset Management is concerned the political turmoil in France could even hurt European unity.

Longer-maturity French bonds have proved more popular with buyers this year, with a 25-year green bond offering via banks receiving record orders in January. A 30-year sale of debt earlier this month was oversubscribed by 2.86 times, close to a four-year high.

--With assistance from Aline Oyamada and Alice Atkins.

(Adds context on dealers in seventh paragraph, strategist comment in eighth paragraph.)

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