What the French Election Could Mean for Bonds

April's French presidential elections are being seen as the next political event that could unsettle global financial markets

Mark Preskett 28 March, 2017 | 9:21AM
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Mark Preskett: April's French presidential elections are being seen as the next political event that could unsettle global financial markets. The polls are close, they have independent candidate, Emmanuel Macron, narrowly ahead of far-right leader Marine Le Pen and most experts have the two facing off for the presidency in the second round of voting in May. Macron's pro-market and pro-Europe policies differ radically to Le Pen's, who has vowed to take France out of the EU if she wins.

How is this affecting bond markets? Well, the yields on French government bonds have risen during the election campaign and are now trading at a 60-basis-point premium to their German equivalent debt. In our view, these spreads are still quite tight given the risks of a Le Pen win or a surprise from one of the far-left candidates like Melenchon. Investors are clearly relatively relaxed about a Macron win, although we are seeing some short selling in the French government bond futures market by hedge funds.

For our European portfolios at Morningstar, we see Eurozone government debt as a low conviction asset class. Yields are low and we much prefer the surety of cash than taking significant sovereign risk in Europe.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Mark Preskett  is a Senior Investment Consultant & Portfolio Manager for Morningstar UK