The main driver of European bond markets this week (as during the two or three previous weeks) has been political develop-ments in France in the run-up to the presidential elections (with François Bayrou joining up with Emmanuel Macron, the environ-mental party candidate doing the same with Benoit Hamon, and polls pointing to a very low voter turnout). The prospect of a victory by Marine Le Pen, which would open the door to a possible French exit from the euro zone, continued to squeeze French bonds.
The France-Germany spread is at a high since the end of 2012 (at 74bp on Friday). Keep in mind, however, that the credit risk premiums on almost all euro zone countries has risen in recent weeks, given that the euro zone’s fate requires France’s participation. Meanwhile, the retreat to German bonds, deemed safer, sent the 10-year German yield down to 0.20%, a year-to-date low.
In light of the above, it’s better to stay conservative until the elections but while keeping in mind that the ECB had said that its monthly asset purchases would move back to €80bn “If … the outlook becomes less favourable or if finan-cial conditions become inconsistent with further progress towards a sustained adjustment of the path of inflation”.
For the moment, IG and HY euro bond spreads seem to be ignoring the political risk from French elections. Despite the widening in the France-Germany spread, IG and HY euro spreads have remained stable. IG debt of companies domiciled in France exceeds €400bn, or 23% of the index, making France the country with the heaviest weighting. What’s going on here?
The French elections will also be a decisive event for the euro credit markets over the coming weeks. Spreads on euro-denominated bonds could widen in the event of:
Clearly, euro bond markets will continue to be driven by political risk and the direction of ECB policies.
This note is the first in a series that will accompany you until the results of the presidential and legislative elections (and probably a little further). Here we set the scene before proposing specific thematic topics.
Global Head of Research, Strategy and Analysis at Amundi
Valentine AINOUZ, Bastien DRUT