Le Pen Worries Evaporate Before Run Off: French Election Monitor

(Bloomberg) -- With just three days to go before the final round of French elections, a sense of calm pervades markets as Emmanuel Macron looks set to prevail over rival Marine Le Pen.

Risk gauges show investors are mostly ruling out the possibility of a presidential win by anti-euro candidate Le Pen after they pared hedging following her centrist opponent's thumping victory in the preliminary ballot. Opinion polls consistently indicate a 20 percentage point advantage for Macron, and a snap survey by polling firm Elabe adjudged him the winner in a television debate on Wednesday.

Here's a look at what market indicators show:

The premium investors demand to hold France's 10-year bonds relative to German bunds is the lowest since January. French debt yields have dropped as much as 36 basis points from this year's high of 1.16 percent touched in February.

The difference between French and German credit-default swaps has shrunk as investors discount Le Pen's pledge to re-denominate France's debt into a new local currency.

Haven demand for the yen has dipped but hasn't completely disappeared as some investors guard against the extreme tail risk of a Le Pen win. The cost of options to buy the euro against the yen remains near levels seen before the first round of voting on April 23. The far-right candidate struggled to defend her plans to leave the common currency in Wednesday's TV debate.

Ebbing risks of a Le Pen victory as well as continued European Central Bank bond buying have helped tighten further the spread between the iTraxx Senior and Subordinated financial indexes.

European equity volatility has remained subdued as the region's main stock gauge has rallied to a 20-month high. The VStoxx Index had risen to its highest level since the aftermath of the Brexit referendum before the first round of French voting, capturing the anxiety of investors.

Bund volatility slumped the most since the European sovereign crisis following the election's first round. The one-month 50-delta implied volatility on bund futures is at 5.7, compared with this year's high of 8.4.

--With assistance from Tanvir Sandhu and Vassilis Karamanis

To contact the reporter on this story: V. Ramakrishnan in London at rvenkatarama@bloomberg.net.

To contact the editors responsible for this story: Samuel Potter at spotter33@bloomberg.net, Cecile Vannucci, Cecile Gutscher