French, Italian bond yields plunge after Macron win, 5-Star setback

LONDON: Prospects of victory for French president Emmanuel Macron’s fledgling party and a setback for Italy’s populist 5-Star Movement eased political worries in eurozone debt markets, sending yields to multi-month lows.

Projections from the first round of French parliamentary elections on Sunday suggested Macron’s LREM party was set to secure a big majority to push through pro-business reforms.

But Italy’s maverick 5-Star Movement looked set to suffer a severe setback in local elections, a development that could undermine its hopes of winning a national vote due by May 2018 and suggested it is losing steam like other anti-establishment parties across Europe.

Positive signs for stability and cohesion in two of the eurozone’s biggest economies was viewed as positive not just for French assets, but also for peripheral markets that have been in the firing line from any signs of instability in the single-currency bloc.

“Macron doing well in the first round of the French parliamentary elections bodes well for him getting a majority,” said Lyn GrahamTaylor, fixed-income strategist at Rabobank.

“The fact that 5-Star did poorly in local elections in Italy also suggests a setback for populism in Europe.” Italy’s 10-year government bond yield slid eight basis points to 2.01%, its lowest level since late January, while the gap over German peers tightened sharply to around 175 basis points – its narrowest since late May.

The fact that 5-Star did poorly in local elections in Italy also suggests a setback for populism in Europe. Lyn Graham-Taylor

Italian yields ended last Friday with their biggest weekly fall of 2017 as a failure to reach an agreement on a new electoral law was seen reducing the chances of early parliamentary elections.

Portugal’s 10-year bond yield hit a ninemonth low at 2.97% yesterday, while Spanish peers fell to 1.39%, their lowest level since January. The euro was a touch firmer, while Italian stocks dipped 0.2%. French bonds outperformed higher-rated eurozone equivalents.

France’s 10-year bond yield fell 3.5 basis points (bps) to 0.615%, its lowest level since November, while the gap over German Bund yields tightened to around 36 bps from around 39 bps last Friday.

Pollsters project Macron’s alliance could win as many as three-quarters of the seats in the lower house after next week’s second round of voting.

That would give France’s youngest leader since Napoleon a powerful mandate to make good on campaign pledges to revive France’s fortunes by cleaning up politics and easing regulations that investors say hobble the economy.

It also provides a contrast with Britain, where the ruling Conservative party unexpectedly lost its parliamentary majority last week, weakening Prime Minister Theresa May just days before negotiations over the UK’s departure from the EU begin.

“While the political situation in the UK has become more complicated, across the Channel, conventional wisdom appears to have been turned on its head as Macron’s new party ... has swept the board in the first round of French parliamentary elections, no mean feat for a movement that didn’t even exist two years ago,” said CMC Markets chief market analyst Michael Hewson. — Reuters