French Bond Recovery Has CA-CIB Flagging Mispriced Election Risk

  • 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

— With assistance by Anchalee Worrachate

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