By Mike Bird and Jon Sindreu
Investors are once again selling the bonds of Europe's
peripheral economies amid political concerns. This time around,
France has joined the club.
Some investors are selling French government debt, worried that
the country will elect Marine Le Pen as its president, a candidate
that has promised to take the country out of the eurozone. That has
left French bonds behaving increasingly like their peers in the
parts of Europe hit hardest by the 2011-12 sovereign-debt
crisis.
It is quite a flip for Europe's second-largest economy. After
that crisis, French bonds traded with Germany's. On Monday, a poll
showing Ms. Le Pen comfortably in the lead for April's first round
of the presidential election drove yields on French 10-year bonds
to jump to 1.064%. Yields rise as bond prices fall.
The spread with German bond yields hit 0.84 percentage point
during the day on Monday, the highest in more than four years,
before settling at 0.75 percentage point as European markets
closed. Six months ago, this gap was only 0.22.
Also rising are Italian and Portuguese 10-year yields which are
up by around 0.7 percentage point against Germany's in the last six
months. Greek yields have jumped.
The premium that investors demand for holding the debt of these
nations over richer northern European economies like Germany and
the Netherlands will continue to rise as a range of risks grow and
the European Central Bank's massive bond buying program buys less
debt, investors say.
It could be French yields leading the charge higher this time.
Analysts at Japanese bank Mizuho Financial Group, Inc. told their
clients Monday that they should stop treating French government
bonds on par with German or Dutch debt.
"France is in the driving seat" in eurozone bond markets,
Francesco Garzarelli, co-head of European macro research at Goldman
Sachs said in a recent research note.
To be sure, Southern European spreads were widening before
concerns spiked over France. In Italy and Portugal, economic growth
remains weak as bad debts burden banks. In Greece, concerns have
resurfaced that officials will fail to secure new loans from
European creditors.
But, in the eurozone, there is a history of selling in one
country's bonds that ripples out across weaker members of the
currency bloc. France appears to now be acting in that role.
"If France was to leave, the viability of the remaining euro
would be very difficult to justify," said Neville Hill, co-head of
global economic research at Credit Suisse.
The French presidential election takes place over two rounds
this spring. Most experts and polling suggest Ms. Le Pen will fail
in the election's second round, as voters choose an "anyone but Le
Pen" candidate. But international investors, in particular, are
fretting about the possibility that the National Front's candidate
will pull off a Brexit-style surprise and shock markets.
A poll released Monday suggests Ms. Le Pen will win the first
round of the vote, but lose in the second round, garnering 42% or
44% respectively against Emmanuel Macron and François Fillon, the
two next most popular candidates. But Ms. Le Pen's second-round
polling support has been rising in recent months, causing
volatility in European bond markets.
Within the 19-nation eurozone, investors always dump the bloc's
weaker economies and rush into stronger members like Germany
whenever risks of a breakup of the currency emerge.
In 2012, the European Central Bank stemmed the fall in
peripheral bonds by buying up billions of euros in this debt.
But ECB bond-buying has passed its peak.
Starting in April, officials will cut the amount of bond-buying
they do every month from EUR80 billion ($84.89 billion) to EUR60
billion, as part of a broader trend of developed world central
banks reducing their involvement in markets.
The program's strict rules also mean that the ECB has to buy a
smaller share of the debt of some of the neediest nations, chiefly
Portugal. While ECB officials suggested last week that they may be
increasingly favoring flexibility in these rules, investors remain
worried that they hamper the bank's ability to prop up peripheral
debt.
"Without ECB support it's hard to see how their spreads don't
widen up further," according to Said Haidar, chief executive of the
New York-based hedge fund Haidar Capital Management. Mr. Haidar is
now betting against Southern European and French bonds.
Still, the ECB is unlikely to allow eurozone yields to reach
2012 levels again, investors say.
And not all of the periphery is looking shaky. Investors see the
bonds of two peripheral nations, Spain and Ireland, as increasingly
being on safer footing, just as they view French debt on shakier
ground.
Spain's 10-year bond yields are now around 0.5 of a percentage
point above Italy's, their most positive spread against Rome in
five years. Ireland's 10-year yields are now practically equal to
France's, yielding 1.047% and 1.035% respectively on Monday.
Investors are also finding bargains in the midst of Europe's
latest round of political turmoil, even in France. Since January,
Adam Whiteley, portfolio manager at London-based Insight
Investment, has bought French government debt while selling French
corporate bonds, because he believes that the gap between the two
has narrowed too much.
Also, most investors -- particularly French ones -- still
believe it is unlikely that euroskeptic candidates like Ms. Le Pen
will win power, and overcome Europe's complicated electoral
systems.
"I see the risk as limited," said Frédéric Lamotte, chief
investor at Indosuez Wealth Management. "From a portfolio point of
view, generally, I don't care."
Write to Mike Bird at Mike.Bird@wsj.com and Jon Sindreu at
jon.sindreu@wsj.com
(END) Dow Jones Newswires
February 20, 2017 12:48 ET (17:48 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.