Threat of President Le Pen Sends French Bond Yields to 2015 High

(Bloomberg) --

The prospect of a Marine Le Pen presidency is spooking investors in the French bond market as the far-right candidate closes in on incumbent Emmanuel Macron ahead of Sunday's election.

Investors have been dumping French debt this week, pushing 10-year borrowing costs to a seven-year high. The yields are on course for their fifth monthly rise, a streak not seen for over a decade, showing the market's concern over the looming exit from ultra accommodative monetary policy in the euro region. 

Polls show that after the first round of voting, Macron is likely to face Le Pen in a run-off vote two weeks later -- one that could prove highly uncertain. The opposition candidate narrowed Macron's lead in recent weeks after moving away from anti-euro rhetoric and courting voters with pledges to slash gasoline prices and tax big energy companies. That jolted bond traders, whose perception of risk on French sovereign debt -- measured by the bonds' premium over German counterparts -- jumped to the most in two years. 

Le Pen “is more palatable for markets this time, as leaving the euro area does not feature in her campaign,” said Jordan Rochester, a strategist at Nomura International Plc. “That is where the good news ends.”

A Le Pen victory would send the euro lower and further widen bond spreads, Rochester said. Macron would beat Le Pen 51% to 49% in a runoff, according to poll of voting intentions by Elabe published on Friday ahead of the election. 

Safety Net

Beyond Sunday's election, a policy shift for the European Central Bank looms on the horizon. The ECB removed the safety net of bond purchases last month. Introduced in response to the coronavirus pandemic in March 2020, the 1.85 trillion euro ($2 trillion) program kept a lid on the single-currency region's borrowing costs. 

Minutes of last month's meeting showed some policy makers wanted to set an end date for a smaller asset-purchase program, which has been running since 2015. That would clear the way for a possible rate hike in the third quarter to combat euro-area inflation that's already almost four times the 2% target. 

That said, the ECB is working on a backstop that would be available for the Governing Council to use against debt-market stress caused by shocks outside the control of individual governments, said officials familiar with the plans, who asked not to be identified because the matter is confidential. 

ECB Is Crafting a Crisis Tool to Deploy If Bond Yields Jump 

Money markets are betting on quarter-point rate hikes in September and December, which would lift the deposit rate to zero for the first time in eight years. Analysts surveyed by Bloomberg see the ECB delivering its first rate increase in more than a decade in December. 

Contagion Risk?

Le Pen has cast herself as the candidate of ordinary people she calls the “little ones,” and shifted her focus to addressing the cost of living crisis. But her past euroskeptic comments still cast a long shadow among investors. 

“Unless Le Pen comes out swearing her loyalty to the euro, the risk is that her victory creates anti-euro sentiment and ushers in a new era of uncertainty,” said Rishi Mishra, an analyst at Futures First. 

That could reignite concern over Italian debt ahead of next year's general election in that country and revive memories of the 2018 vote, which gave way to a populist coalition that often clashed with the EU over budget restrictions. 

Back then, Italy's yield premiums -- a key gauge of risk in the region -- were pushed to a five-year high, a level not seen since. Ahead of Sunday's French vote, Italian bond spreads surged to a near six-week high.

“Italian bonds may suffer the most should she actually win,” Mishra said. 

Next Week

• The European Central Bank policy decision on Thursday, followed by President Christine Lagarde's press conference dominate next week
• Bond sales are mostly focused on 10-year maturities with Germany, Italy and the Netherlands expected to sell about 20.5 billion euros according to Citigroup Inc.

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