French bond investors are confident President-elect Francois Hollande’s cabinet picks will be market-friendly, yields close to a seven-month low suggest.
“If Hollande has any sense, which he does, then I wouldn’t expect him to antagonize the markets,” said Michael Riddell, a fund manager at M&G Investments in London, which oversees about $323 billion.
With the rise of Greek anti-austerity political parties roiling markets, bondholders are anticipating the Socialist leader will choose ministers who favor free-market policies over those who have opposed fiscal rigor once he’s sworn in May 15. Hollande’s appointments will be among the first indications of the direction he intends to take.
Two days after Hollande defeated President Nicolas Sarkozy in the May 6 election, France’s 10-year yield dropped to a two-month low of 2.76 percent, one basis point shy of its lowest since Oct. 10, 2011. It was at 2.85 percent today.
The extra yield, or spread, investors demand to hold the securities instead of similar-maturity German bunds is 131 basis points, down from 149 basis points on April 20, the last day of trading before the French election’s first round on April 22. That level was the widest since Jan. 9. The average spread during the past year is 94 basis points.
French debt has returned 2.9 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds have risen 2.2 percent. In the past month, French bonds have added 0.6 percent.
Investors would be dismayed if Hollande were to name Martine Aubry, best known for implementing France’s 35-hour work-week law a decade ago, as his prime minister, said Piet Lammens, head of research at KBC Bank NV in Brussels.
“If Madame Aubry was made prime minister or minister of finance that wouldn’t be welcomed by the bond market,” he said. “We know she is against many of the reforms of Mr. Sarkozy and would be more eager to change them.”
Jean-Marc Ayrault, the German-speaking head of the Socialist group at the National Assembly and Hollande’s point man for negotiating with Germany’s Social Democrats, is among the market favorites for the top job in the Hollande government.
“I don’t believe Hollande is going to scare the market by appointing a staunchly leftist prime minister,” said Nicholas Spiro of Spiro Sovereign Strategy in London. “It looks like he will pick Ayrault.”
Michel Sapin, 60, who was finance minister in the early 1990s for former President Francois Mitterrand, may play the same role in the Hollande administration.
Hollande’s government will be constrained by slowing growth and government debt approaching 90 percent of gross domestic product this year.
“The premier he appoints is going to have the same room for manoeuvre whoever he or she is,” said Spiro.
Although Hollande, 57, has promised to shrink France’s budget deficit to 3 percent of gross domestic product next year and to eliminate it by the end of the next presidential mandate in 2017, he has said little about cutting spending.
His campaign promises include hiring 60,000 teachers and public school employees and 5,000 police officers over the next five years, pulling back the minimum retirement age to 60 from 62 and reworking the fiscal treaty agreed to by European leaders in December to include growth.
Hollande’s victory was greeted with disappointment by those surveyed in the Bloomberg Global Poll as 71 percent said it makes them less willing to buy French bonds. Sixty percent regarded Hollande unfavorably and 71 percent viewed his policies with pessimism, according to the survey of the 1,253 investors, analysts and traders who are Bloomberg subscribers.
“French government bonds have a great intrinsic risk due to the fact that Hollande hasn’t exactly based his presidential campaign on how to cut expenditures,” said Christian Borjesson, chief analyst at Nordea Markets in Stockholm. “To bond markets, that’s nothing but bad news. The only thing that could prevent austerity is growth.”
With the economy estimated by the government to slow to 0.7 percent this year from 1.6 percent in 2011, Borjesson is maintaining his “bearish view ”on French government debt.
Still, expectations that Hollande, for all his criticism of the German-led austerity push to fight Europe’s sovereign debt crisis, won’t turn his rhetoric into deficit-swelling action has made French bonds more attractive than Spanish securities.
The spread between France’s 10-year bonds and similar maturity Spanish securities widened 18 basis points to 3.21 percentage points yesterday as the French benchmarks outperformed their Iberian counterparts. That’s the widest gap since March 1996, according to closing price data.
End of Merkozy
On the campaign trail, Hollande differed with German Chancellor Angela Merkel about steering the region away from a focus on austerity as the solution to its debt crisis and toward measures intended to spur growth.
The issue might get traction after a split parliament in Greece risks its future in the euro area. The country’s second-largest party is threatening to reject the terms of the European-led bailout.
That may be among the most pressing matters in Hollande’s in-tray when he takes over. The close working relationship between Sarkozy and Merkel led to the coining of the term “Merkozy” and helped Europe’s two largest economies steer the course of Greek politics last year when then Prime Minister George Papandreou wanted to call a referendum on the bailout.
Now, Hollande will have to find a way to patch up his differences with Germany’s leader in setting a response to the new strength of anti-bailout parties in Greece’s new parliament.
German Finance Minister Wolfgang Schaeuble said last week that his government will look for ways of allowing Hollande to “save face” while expecting him to uphold commitments to Europe’s budget treaty. Hollande’s campaign chief Pierre Moscovici said yesterday that both Hollande and Merkel understand they need to cooperate.
“It’s clear that there are differences of approach between” Merkel and Hollande, Moscovici told Le Monde newspaper in an interview. “Everyone is aware of their responsibilities. Franco-German accord is an imperative for the future of Europe.”