France’s Last Bond Sale Before Vote Signals Waning Market Angst

(Bloomberg) -- France’s last bond sale before a final election round went smoothly, adding to signs the uncertainty that has roiled markets and triggered concerns over the nation’s finances is abating.

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The Treasury raised €10.5 billion ($11.3 billion) from the offering of debt with maturities of up to 40 years, the maximum amount targeted. Bids across all four bonds were 2.58 times the total amount sold, higher than the demand seen at the two most recent sales of similar maturities.

“Quite strong French auctions,” said Evelyne Gomez-Liechti, a strategist at Mizuho International.

Investors have made the most of the market moves “to buy cheap in this auction,” she said, referring to a selloff that drove French bond spreads to multi-year highs last month. “Especially with the two tail risks — far-left and far-right absolute majorities — now seemingly off the table.”

The bond auction is the second since President Emmanuel Macron called the snap vote, which ignited a major rout in French assets. Investors have been concerned that Marine Le Pen’s far right National Rally would emerge victorious with an absolute majority in parliament, allowing it push through expansive fiscal measures. Since then, both bonds and stocks have recovered some of their losses as that prospect wanes.

Attempts by a centrist and left-wing alliance to stymie the National Rally’s ascent appear to have borne fruit. Meanwhile, a recent poll by Toluna-Harris Interactive showed that the National Rally and its allies would get between 190 and 220 seats, significantly less than the 289 needed for an outright majority.

The optimism has narrowed the gap between French and German 10-year yields to 67 basis points from last week’s peak of 86 basis points. The CAC 40 index has recouped around half of its declines, with Morgan Stanley strategists recommending clients buy French equities.

Longer-maturity French bonds have proved more popular with buyers this year, with a 25-year green bond offering via banks receiving record orders in January, while a 30-year sale of debt earlier in June was oversubscribed by 2.86 times, close to a four-year high. An auction of medium-maturity debt last month was met with decent demand.

Still, the fiscal challenges that lie ahead in France are likely to keep French bonds under pressure. Investors — many of whom were short OATs even before the election was called — say the repricing was long overdue with France’s 5.5% budget deficit in breach of the European Union’s 3% limit.

(Updates with strategist comment in third paragraph, dditional context from fifth paragraph.)

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