French Bond Recovery Has CA-CIB Flagging Mispriced Election Riskby
Markets are yet to properly price in risks: CA-CIB’s Kumar
Doubts on Fillon win could see French-German yield gap surge
The risk posed by next year’s French elections isn’t fully priced-in by markets, according to the head of rates strategy at the corporate- and investment-banking unit of nation’s third-largest bank.
The spread between France’s 10-year bond yields and those on similar-maturity German bunds has retreated from the 32-month high reached in late November, as market concerns of a populist wave sweeping across the nation ebbed, and recent polls signaled far-right, anti-European Union leader Marine Le Pen would likely lose to conservative Republican Francois Fillon in the presidential race. Still, the respite might be short-lived if doubts on Fillon’s chances surface, according to London-based Credit Agricole CIB strategist Mohit Kumar.
“The way the market is pricing it is asymmetric in my view and that I think is quite a bit of risk from an investor perspective,” Kumar said. “If there is a political risk, you stand to lose a lot more.”
The yield gap is currently about 45 basis points, and a positive outcome could push it toward the 30 basis-point level that matches fundamental valuations, Kumar said. If the spread fell closer to that mark in the run-up to the vote, that would be “a ‘sell zone’ rather than a ‘buy zone’ simply because the risk-reward is way too asymmetric,” he said.
- French-Germany spread reached 56 basis points on Nov. 28, the highest since March 2014 on a closing basis.
- France’s sovereign debt has returned about 3.6 percent this year, according to Bloomberg World Bond Indexes, compared with a 3.1 percent gain in a wider gauge of euro-region debt.
- Fillon and Le Pen would lead the voting in the first round of the election, a major poll showed last week. Le Pen lost about 3.5 percentage points since the last survey in November.
- France’s presidential race has two rounds of voting, on April 23 and May 7.
- Le Pen No Trump for Local Buyers of France’s Government Bonds: Link