Posted February 23, 2017 Ashley Chadwick
Yesterday German bond yields fell to record lows amidst fears that the far right could win the French Election.
The ECB’s bond buying program has already seen yields tumble in the Eurozone, but the growing political uncertainty in France is helping push them even lower. Polling is showing growing support for Marine Le Pen, the leader of the National Front in France. She is expected to win the first round of voting comfortably, but then is likely to lose out in the final run off against either the centrist Emmanuel Macron, or the centre right candidate Francois Fillon.
Le Pen, who was a large supporter of Brexit, has said she will break up the single currency of the Euro if she wins and would look to follow Britain’s lead and take France out of the EU. This is why her strong polling performance is causing a run into the safety of German bonds. The yield on the Schatz, the German 2-year, fell to -0.92% during the day. They did rally back off those lows upon the news that independent candidate Francois Bayrou had dropped out of the race and was backing Macron. Macron is currently seen as the favourite to both face Le Pen in the second round and to become President.
However, as we saw last year, the pollsters are often wrong. Furthermore, support for Macron and Fillon has been slipping, whilst Le Pen’s support amongst the right wing is fairly constant. Fillon is caught up in an embezzlement scandal and has been losing support. Macron may come under added pressure as he faces more scrutiny over the next two months. He is currently drawing support from all across the political spectrum, the only exception being the supporters of Le Pen. This means that his supporters have very diverse views and as he has to elaborate on his policies more, he runs the risk of alienating some of them and slipping further in the polls.
The run on German Bonds has continued today, with the Schatz just 3 ticks away from the all time highs seen yesterday and the Bund is up 40 ticks on the day. With little movement expected in ECB policy in the coming months, politics may be the determining factor in European Bonds.