Investors Are Keen to Buy French Bonds...Once the Dust Settles

  • Asset managers see more political clarity after April vote
  • Vanguard staying ‘cautious,’ says timing rebound is ‘tricky’

For all the talk of turmoil in French bonds, some of the biggest investors are waiting for an opportunity to buy more.

Lyxor Asset Management says fears that this year’s presidential vote will lead to a political upset that wrecks the euro bloc are overblown, and is looking to buy French debt once the market settles. Amundi Asset Management is keen to add to holdings when volatility subsides, while Vanguard Group Inc. says anti-euro candidate Marine Le Pen’s prospects should fade at some point, buoying bonds.

For now, the funds are avoiding fresh positions as French bonds bear the brunt of investor anxiety about a political surprise similar to Donald Trump’s win and Brexit, with the latest polls showing rising support for Le Pen. Concern about risks surrounding the election have caused French 10-year yields to rise above lower-rated Ireland’s. The first round of voting in April should bring clarity and, potentially, opportunity, according to the asset managers.

“We’ll be looking for some opportunity closer to the first round to go long on France, as at the end of the day we’re not negative on the country,” Isabelle Vic-Philippe, Paris-based fund manager, head of inflation and duration at Amundi, said in Feb. 21 phone interview.

Amundi, which holds 1.9 billion euros ($2 billion) of French notes according to Bloomberg data, is staying “neutral for the time being,” said Vic-Philippe.

Societe Generale SA’s Lyxor Asset, which says it holds 2.9 billion euros of French bonds in the “non-passive” category, has pared its exposure since the end of 2016 but says it may add to holdings between the April and May votes. In the meantime, the fund sees German bonds, especially five-year ones, and the debt of supranational agencies as appropriate investments to hedge the election risk.

Exaggerated Risk?

“The view is constructive but not immediately,” Jean Sayegh, Paris-based head of fixed income investments at Lyxor Asset said in a Feb. 22 phone interview. “We are going to be adding but we haven’t started yet. The market could be overestimating the potential of change especially in countries like France where changes don’t happen very quickly. Even if Le Pen wins the election, she won’t have the majority in the parliament.”

Vanguard, the world’s largest mutual-fund company, is currently keeping a “cautious” approach and plans to reassess its position after the April vote, according to Nick Eisinger, a London-based strategist. The fund holds 4.4 billion euros of French debt, according to Bloomberg data.

The market may face more short-term volatility as election risks may not be fully priced yet, said Eisinger. Asian investors, particularly those from Japan, may be paring holdings in France heading into the vote, he added.

Trump Effect

“We have cut our position on France’s government bonds to the benchmark level from overweight since Trump won the U.S. election because we expected similar political developments and higher yields to spread into France and Italy,” said Eiichiro Miura, lead portfolio manager in Tokyo at Nissay Asset Management, which oversees the equivalent of $87 billion. “It’s still too early for dip-buying given the continued selloff and the French election ahead.”

Still, many investors have a positive longer-term view on French bonds.

“I will continue to hold a healthy allocation to French government bonds and look to allocate tactically as opportunity arises,” David Simner, London-based portfolio manager at Fidelity International, said in e-mailed comments on Friday. “It is unlikely that Le Pen herself would follow through on some of the more emotive rhetoric.”

Morgan Stanley recommended last week that investors buy the nation’s notes heading into the vote as yield spreads on the notes should to tighten if Le Pen loses, which is the central scenario projected by the bank, strategists including Andrew Sheets and Phanikiran Naraparaju wrote in a client note dated Feb. 23.

Societe Generale says investors are “obsessed” with the risk of a Le Pen win. Still, the French bank sees “little value in fighting market fears for now” and says the nation’s inflation-linked debt maturing July 2019 should perform well on most election outcomes, strategists including Ciaran O’Hagan wrote in a note dated Feb. 20.

“Our base-case scenario is that Marine Le Pen continues to scare the market but she won’t automatically be the next president,” Vanguard’s Eisinger said in a Feb. 20 phone interview. “The more interesting time to think what you are going to do with the French position will be after round one. If people are genuinely comfortable with Le Pen not getting in, then, maybe these bonds can bounce back. The timing is tricky.”

— With assistance by Shigeki Nozawa, Masaki Kondo, and Anooja Debnath

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