France/Germany spread hits two-week low

  • Business
  • Friday, 17 Mar 2017

LONDON: France’s government bond yield spread over Germany hit its narrowest in two weeks after results of the Dutch parliamentary election put the populist party of Geert Wilders a distant second to the current ruling party.

French government bonds were seen as vulnerable if Wilders’ PVV had emerged as the biggest party, as France faces its own presidential elections in April and May, with far-right leader Marine Le Pen expected to make it to a second round run-off.

However, Dutch centre-right Prime Minister Mark Rutte’s VVD party scored a clear victory, taking 33 seats to the PVV’s 20.

“For international investors, this result shows that the populist sentiment in Europe is not comparable to what we saw in the US and UK last year, and in their eyes it decreases the chances of Le Pen becoming president in France,” said DZ Bank analyst Rene Abrecht.

The gap between France and Germany’s 10-year borrowing costs fell below 60 basis points (bps) for the first time since March 3, down 4 basis points on the day and far below its February high of 83.5 bps.

The latest opinion poll suggests Le Pen will win the first round of French voting with 26.5% of the vote but centrist Emmanuel Macron is seen winning the second round comfortably.

At one stage, France’s 10-year government bond yield fell as much as 5 bps to a one-week low of 0.99%, though it gave up much of that drop as the session wore on.

German 10-year government bond yields moved higher yesterday and were last up 3 bps at 0.44% – a move that ING strategist Benjamin Schroeder attributed partly to relief at the Dutch election result.

“Bund yields were compressed by the political risk in Europe so you might be seeing a bit of release of that pressure this morning,” he said.

Some of the upward pressure may have come after the US Federal Reserve delivered its first rate hike of the year on Wednesday.

However, US policymakers did not flag any plan to accelerate the pace of monetary tightening, prompting some analysts to brand it a “dovish hike”. This was reflected in 10-year Treasury yields, which dropped 10 bps to 2.5% on Wednesday, before climbing 2 bps again yesterday.

“The Fed seems in no hurry to tighten policy as it again pledged a ‘gradual’ tightening amid only modestly changed main projections for growth, unemployment rate and inflation from the last projections,” ING analysts said in a note.

Markets are pricing in two more rate hikes this year and three in 2018, the analysts said. — Reuters

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