French Bond Rout Deepens as Spreads Hit Widest Since 2017

(Bloomberg) -- French bonds tumbled, driving yields over safer German peers to the highest level in seven years, amid concerns Marine Le Pen’s far-right National Rally party will usher in looser fiscal policies if it wins upcoming elections.

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The spread between French and German 10-year yields widened to close at 70 basis points on Thursday, the most since 2017. That followed an Elabe poll for daily newspaper Les Echos, which showed President Emmanuel Macron’s approval rating has fallen to its lowest level since 2018.

The premium that France pays on its debt relative to Germany has soared more than 20 basis points this week, on pace for the biggest move stretching back to the European debt crisis in 2011. And activity in the futures market suggests traders anticipate the rout will continue. They now hold the largest number of 10-year futures positions in at least a year, according to data from the Eurex exchange, a move that — when coupled with the market action — points to rising short wagers.

France’s left-leaning political parties sealed an alliance on Thursday evening to join forces in the upcoming legislative election, with polls showing it can win the second-biggest bloc behind Le Pen’s National Rally.

The French president shocked investors on Sunday by calling a snap vote after his party suffered a crushing defeat in European parliamentary elections. Polls show Le Pen’s National Rally — which has previously supported policies such as cutting sales taxes and reducing the retirement age — has a substantial lead going into the first round of voting on June 30.

“A victory for Marine Le Pen’s National Rally could lead to market concerns around fiscal indiscipline and a stand-off with the European Commission,” said Chris Attfield, a European rates strategist at HSBC Holdings Plc.

While the National Rally has not yet made detailed proposals for this election, Le Pen’s plans in the 2022 presidential campaign would have cost €120 billion ($130 billion) a year and increased the country’s deficit by €100 billion a year, according to an analysis by Institut Montaigne, an independent think-tank close to Macron.

S&P Global Ratings last month downgraded the nation’s credit score, saying the budget deficit will remain above 3% of gross domestic product through 2027. Moody’s Corporation said in a note Monday that snap election increases the risks to plans to plug the holes in the budget.

French equity markets were also hit, with the CAC 40 index falling 2%, putting it on track for its worst week in nearly a year. Banks fell the most, with Societe Generale SA down 12% and BNP Paribas SA down 10% on the week.

The short-term volatility differential between French and German equities has also widened. One-month implied volatility for the CAC 40 is now 2.7 volatility points above that of the DAX Index, the highest spread since December 2021. Such divergence has very rarely occurred in the past eight years.

French Finance Minister Bruno Le Maire this week warned the country would be plunged into a debt crisis similar to one sparked in the UK two years ago by Liz Truss if Le Pen were to win and implement her economic program.

“A debt crisis is possible in France, a Liz Truss scenario is possible,” he said.

--With assistance from Blaise Robinson and Michael Msika.

(Updates with news of left-leaning political parties’ alliance in fourth paragraph.)

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