German Bonds Fall as French Election Hedges Trimmed After Debate

  • Polls show Macron most convincing in first presidential debate
  • Short-dated German bonds used to hedge French vote risks

Macron Leads the Pack Following First French Debate

German short-dated bonds led losses in European government debt as investors unwound hedges against French election risks, after polls showed centrist candidate Emmanuel Macron was the most convincing in a presidential debate.

Yields on German two-year notes rose three basis points to minus 0.75 percent, the highest in six weeks. The securities have been the main beneficiary of worries centered around anti-euro candidate Marine Le Pen winning the French elections, as well as buying by the region’s central banks. Two snap polls showed Macron beating Le Pen in the first televised presidential debate on Monday evening.

  • The German five-year sector also underperforms, cheaper by 2 basis points on 2s5s10s, while Euro Interbank Offered Rates extend losses with the strip bear-steepening
  • The improved market confidence is leading to increased bets on an ECB rate move
    • ECB-dated Eonias move back to pricing around 22 basis points of depo rate rises by Sept. 2018, compared with around 19 basis points as of yesterday’s close
  • French 10-year bonds are little changed while yields on two-year notes rise 1 basis point
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