France’s Bonds Feel Election Jitters as Trump Spurs Market Split

  • French-German yield spread widens to most since September 2015
  • Markets likely ‘more reactive’ to politics post-Trump: Nomura

The rift between core European bonds from France and Germany increased after Donald Trump’s surprise victory in the U.S. presidential elections.

The difference in yield between 10-year French securities and similar-maturity German bunds, Europe’s benchmark securities, closed at its widest in 14 months on Friday. That mirrors how the spread moved after Britain’s shock decision to leave the European Union in June. The Republican candidate’s rise to prominence was compared in markets to Brexit in that surging populist sentiment helped carry the vote.

This has revived investors’ concerns of a similar outcome in next year’s presidential elections in France. Marine Le Pen, leader of the anti-establishment and anti-Europe National Front party congratulated Trump and said his victory is a harbinger of what could happen in her own country.

“A lot of investors who don’t fully understand the way politics works in Europe are looking at the victory for Trump and are thinking, ‘Could we get the same type of event elsewhere?’” said Charles St-Arnaud, a strategist in London at Nomura International Plc. “Markets are likely to be more reactive to political events like the French election after both Brexit and a Trump win occurred against expectations. This could lead to an underperformance of French bonds relative to peers.”

French 10-year bonds had their worst week relative to their German peers since December 2013, with the yield gap jumping by 11 basis points.

Le Pen and Trump both advocate a restoration of the grandeur of their respective countries, and the two share many views, from blocking immigration flows to raising trade barriers. While the chances of Le Pen becoming president remain low, her far-right party may increase its influence in France’s National Assembly after the legislative election in June and this could have policy implications, according to Nomura’s St-Arnaud.

Widening Spread

France’s 10-year bond yield climbed 28 basis points, or 0.28 percentage point this week, to 0.75 percent as of the 5 p.m. close in London, and it earlier touched 0.79 percent, its highest since January. The 0.25 percent security due in November 2026 dropped 2.698, or 26.98 euros per 1,000-euro ($1,086) face amount, to 95.204.

The yield on benchmark German 10-year bunds rose 17 basis points this week to 0.31 percent. That widened the spread to French securities to 44 basis points, the highest since September 2015.

— With assistance by Chiara Albanese, and Helene Fouquet

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