Opinion polls remain worryingly close in the last few days before the first round of France's presidential election. But that's not reflected in the yield spread of French bonds over German bunds.
There's still plenty of complacency over an eventual win for centrist candidate Emmanuel Macron, a result which would probably lead French bonds to outperform -- though it's questionable by how much. Polls show his support is the least committed of all the candidates, largely as he has an untested political base having broken away from the ruling Socialist party.
Some 30 percent of voters remain undecided, with just 6 percentage points separating the four chief candidates. This is the most open of presidential elections in recent history. As BofA Merrill Lynch analysts point out, there are still multiple possible outcomes to what will end up as a binary event.
In horse-racing terms, backing Macron is akin to putting money on a dead cert. He's odds-on among the bookies. Yet this is evidently a four-horse race. Being long on French risk at these levels is not a value bet.
The prospect of hard-right Marine Le Pen getting into the second round has always been high. The nightmare scenario is if hard-left firebrand Jean-Luc Melenchon joins her. That would see "le spread" between 10-year French and German bonds blow out well above 100 basis points. It widened to 80 basis points when Melenchon made a late surge in the polls, but the fear in the bond markets has steadily subsided despite his polling holding firm.
Even if Macron reaches the second round, as expected, that probably won't tighten the French-German differential much less than 50 basis points until the final vote. Even if he becomes president, the political risk in France doesn't fall away.
The scale of support for Macron in the second round (should he make it there), particularly against Le Pen's showing, will have consequences for the National Assembly elections that follow in June. A President Macron with an inability to form a coherent government wouldn't close the yield gap with Germany.
Short positions on French debt have been squeezed coming into Sunday's vote, with the market already trading as if its net position is long. This leaves less room for spread tightening if Macron does indeed progress to the second round, where polling shows he'll prevail. Little bang for your buck -- and plenty of risk -- suggests this might be one to sit out.
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