European Bond Investors Seek Havens as Political Risks Increase

  • French, Italian bonds fall as political uncertainty weighs
  • German 10-year yield approaches lowest level in a month

European bond investors gravitated toward the safest assets on Friday as political and economic developments pointed to a muddier outlook for the continent.

German bunds led gains among core euro-region securities after French Socialist Party presidential candidate Benoit Hamon said he’s in talks with far-left candidate Jean-Luc Melenchon about a potential single candidacy. That boosts the chance that the anti-euro Marine Le Pen may not face a centrist candidate in the final round of voting in May. Austrian and Dutch securities also advanced.

Italy’s bonds declined as former premier Matteo Renzi faced an uphill battle to avert a deepening split in his ruling Democratic Party, and in the U.K., 10-year gilt yields touched the lowest level since November after data showed retail sales fell for a third month, spurring bets the Bank of England will need to support the economy for longer.

“We remain cautious, both in terms of France and towards peripheral, as the predictability of what may happen between now and the first round” of elections “is very low,” said David Schnautz, a London-based interest-rate strategist at Commerzbank AG. “This argues for the path of least resistance being towards wider spread levels.”

  • German 10-year bund yields -4bps to 0.31% as of 4 p.m. in London on Friday
  • French 10-year yields +2bps to 1.04%; spread versus German bunds widens by 6bps
  • “If a tie up between Hamon and Melenchon were to materialize, then this would be negative for OATs,” said Peter Chatwell, London-based head of interest-rates strategy at Mizuho International. “As a combined force, they could eclipse both Fillon and Macron in the first round, leaving the second round to be a choice of two market-unfriendly candidates"
  • Italy’s 10-year yield +1bp to 2.17%; Austrian 10-year yield -1bp to 0.60%, Dutch -1bp to 0.64%
  • U.K. 10-year gilt yield -4bps to 1.21%, after touching 1.20%, lowest since Nov. 9