French Bond Yields Rise to Highest in a Year After Fillon Probe

  • Yield on nation’s 10-year notes is now above 1 percent
  • Markets are starting to price in a risk premium French assets

Political rumblings in France are having a ripple effect on the nation’s bonds, and those jitters are here to stay, analysts say.

The yield on the nation’s 10-year notes rose above 1 percent for the first time in more than a year as criminal investigations into the employment of Presidential front-runner Francois Fillon’s wife raised investor anxiety over the outcome of elections due in April.

The risk premium on France’s debt over German bunds has widened this month, partly reflecting concern that the anti-euro National Front’s Marine Le Pen could win power and undermine French economic stability as well as the future of the common currency. Donald Trump’s Presidential election victory, as well as the U.K.’s vote in favor of Brexit, highlighted the rise of populist policies among the global electorate, and the risks that can pose to markets.

“There seems to be a political risk premium creeping in that should stay in place unless there’s a huge change in the polls,” said Martin van Vliet, an Amsterdam-based strategist at ING Bank NV. "Much can still happen and a defeat of Front National’s Le Pen is not a done deal."

The yield on France’s notes due November 2026 rose four basis points to 1.01 percent as of 9:59 a.m. in Paris, a level not seen since December 2015. The yield has risen 32 basis points this month, set for the biggest increase since June 2015.

ING predicts the spread between France’s 10-year notes and similar-maturity bunds will widen to 56 basis points by the end of March from about 52 basis points now.

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