European Bonds Unwind Political Risk as French Spread Narrows

  • Trump stimulus expectations weigh on core European bonds
  • French bonds recover in February on election polling

Le Pen Seeks Second-Round Strength in French Election

European government bonds continued to fade the heightened political risk that has prompted benchmark French yields to almost double their premium over German bunds this year.

The yield spread between French 10-year bonds and similar-maturity German debt touched the tightest in more than a week, as anti-euro candidate Marine Le Pen’s momentum has slowed in opinion surveys for a second-round election runoff in May against mainstream candidates. Bets that U.S. President Donald Trump may announce stimulus measures in a speech later on Tuesday weighed on bonds worldwide.

“The market needs to decide whether we are in a big risk-off concern about the European Union or not,” said Orlando Green, a strategist at Credit Agricole SA’s corporate- and investment-banking unit in London. “Elections in Europe are a cause for concern in terms of risk aversion while there’s risk appetite coming from elsewhere, in the U.S. with Trump about to speak.”

  • German 10-year bund yield +2bps to 0.215%; 2-year Schatz +2bps to -0.905% as Germany sells 5 billion euros in new Schatz due 2019
  • French 10-year bond +1bp to 0.89% after falling 22bps in previous four days
  • Italian 10-year yield -3bps to 2.10%; Spanish 10-year yield -1bp to 1.652%
  • French Feb. EU harmonized CPI slows to 1.4% y/y from 1.6% in Jan. and vs 1.7% estimate
  • “It is difficult to imagine the reflation trade has much further to run,” said Peter Chatwell, the head of euro rates strategy at Mizuho
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