French Bonds Gain as Candidates Retire to Curb Far-Right Power

(Bloomberg) -- French bonds gained amid reports that political parties were maneuvering to block an absolute majority for the far-right after Sunday’s second-round vote.

Most Read from Bloomberg

The nation’s 10-year yield premium over safer German peers fell to 71 basis points on Tuesday, the tightest on a closing basis since June 13. That’s the third consecutive day the spread narrowed, the longest streak in almost two months.

The moves suggested markets drew comfort from reports that 200 or more candidates fielded by President Emmanuel Macron’s centrist alliance and the left-wing New Popular Front will step aside in a last-ditch attempt to curb the power of Marine Le Pen’s far-right National Rally.

The decline in the spread shows “some reduced fear of any extreme taking it all and basically doing whatever it wants on the fiscal side,” said Dario Messi, fixed income analyst at Julius Baer. “But it’s still elevated, which also reflects that a majority of the far right is still a very possible scenario.”

Candidates in more than 210 of the 306 three-way runoffs said they would not submit the required documentation as of a 6 p.m. Paris time deadline on Tuesday, according to a count by Le Monde newspaper.

The CAC 40 Index trimmed declines in afternoon trading, ending the session down 0.3% after dropping as much as 1.1%. The euro erased losses of as much as 0.3% against the dollar to trade little changed at 1.0742 in the New York afternoon.

French assets have been roiled by the prospect of Le Pen’s party winning an absolute majority, which would make it easier to increase public spending. The greater spending plans of a leftist coalition inspired even greater fear in markets, though its second place in Sunday’s initial vote has eased some of those concerns.

Bonds gained globally on Tuesday afternoon, helped by Federal Reserve Chair Jerome Powell’s remarks that the latest data is suggesting the disinflation trend has resumed. In Europe, Italy’s yield spread over Germany closed four basis points tighter at 146 basis points, the narrowest since mid June.

Christine Lagarde reiterated that the European Central Bank is “attentive” to the bond market, while declining to comment on the election fight underway in her home country of France.

Volatility in French assets is set to remain high this week as political analysts try to parse how citizens might vote if a candidate they previously backed is no longer running. Fresh scrutiny on France’s bloated deficit is also likely to limit the extent to which the spread can tighten, with investors including Carmignac arguing such a repricing was long overdue.

“Especially during these times of great uncertainty, I try not to read too much even in three basis point moves,” said Benoit Gerard, rates strategist at Natixis SA. He sees the spread fairly valued at around 60 to 70 basis points, and says it could climb to as high as 120 basis points in the event of an absolute majority for the National Rally.

--With assistance from Blaise Robinson and Carter Johnson.

(Adds euro trading, candidate deadline.)

Most Read from Bloomberg Businessweek

©2024 Bloomberg L.P.