Fillon scandal, Frexit concerns, force up French borrowing costs

The premium investors demand to hold France’s government debt rather than Germany’s or Belgium’s hit multi-year highs yesterday with French bonds under pressure from rising political risks before presidential elections in April and May.

The election is shaping up as a major risk event for markets. Investors are concerned over the possibility of a win for Marine Le Pen, leader of the far-right National Front. The FN said on Tuesday it would put leaving the euro at the heart of its economic platform. Le Pen is not favored to win in polls, but the candidate who was, conservative Francois Fillon, has been embroiled in a scandal.

Police searched Fillon’s office in parliament as an inquiry into alleged fake work by his wife threatened his campaign. “The France (bond yield) spread to Belgium is the gauge we use for political risk, and that has widened further after an adviser to Le Pen fleshed out their Frexit plans,” said ING strategist Martin van Vliet, using a term similar to the Brexit of Britain leaving the European Union. “And with Fillon under the microscope as well, France is definitely underperforming.” Fillon, favourite to win the election until a week ago, insists his wife did real work for her pay as a parliamentary assistant. A poll yesterday showed an increase in support for both Le Pen and centrist Emmanuel Macron, with Fillon, the candidate of The Republicans, not making the second round.

The gap between France’s 10-year bond yield and its Belgian equivalent hit 26 basis points on Wednesday, the highest since at least April 2008. The spread over Germany hit an almost threeyear high of 63.5 bps. The debt of France and Belgium are often compared because of their similar credit ratings and geographic proximity. France is rated Aa2/AA/AA and Belgium Aa3/AA/AA- by the three main ratings agencies, Moody’s, S&P Global and Fitch.

France’s 10-year government bond yields rose was up 5 basis points yesterday to 1.10 percent, close to a 16-month high hit earlier in the week and following a 34 bps rise in January, the biggest monthly rise since June 2015. German 10-year yields, the euro zone benchmark, were 2.2 bps higher at 0.46 percent.

Data on Tuesday showed inflation in the eurozone hit 1.8 percent last month, just below the European Central Bank’s target, putting pressure on the bank to wind down stimulus sooner rather than later. Most other eurozone yields were up 24 bps yesterday ahead of the first US Federal Reserve meeting of the year, due to conclude later in the day. The market will be looking for clues as to how aggressive a stance the world’s most important central bank will take on interest rate increases. — Reuters