Risk premium on French debt hits highest since 2012 crisis ahead of election By Reuters

By Harry Robertson and Alun John

LONDON (Reuters) – The premium investors demand to hold French government bonds jumped to its highest since the euro zone debt crisis in 2012 on Friday, highlighting market nerves about parliamentary elections this weekend.

Investors have been on edge since President Emmanuel Macron called snap elections on June 9, raising the prospect that the far right or far left could win and add significantly to France’s large debt pile.

French government bond prices fell on Friday ahead of the first round of voting on Sunday, with the 10-year yield rising 3 basis points to 3.302%, its highest since bonds tumbled on June 11 in the wake of the election call. Yields move inversely to price.

The move pushed up the so-called spread between the French and German borrowing costs – a measure of the extra return investors demand to buy France’s debt – to 84.5 bps, the widest since September 2012.

“The ongoing uncertainty stemming from the French elections and potential fiscal implications are major market concerns,” said Emmanouil Karimalis, macro rates strategist at UBS.

“We are just two days away from the first round of elections, and I think it is natural for the market to be nervous.”

Opinion polls point to Marine Le Pen’s far-right National Rally winning the most seats, but falling short of an overall majority, while a far left-bloc is predicted to come second.

Karimalis said the first round of voting failed to provide clarity in 2022 so markets were likely to remain jittery going into the second round on July 7.

Government bond spreads blew out in 2012 as investors panicked about a potential break-up of the euro zone during a sovereign debt crisis. They currently remain far below peaks seen 12 years ago.

The German yield, the benchmark for the euro zone, was last up 1 bp at 2.461%.

France is not the only issue on markets’ agenda for Friday, with data on the Federal Reserve’s preferred measure of inflation – the personal consumption expenditures index – due at 1230 GMT.

Analysts polled by Reuters are expecting a 2.6% year-on-year reading for May, down from 2.7% in April. A miss in either direction could lead to swings in bond markets.

The gap between Italy and Germany’s 10-year bond yields expanded to its widest since mid-February at 160 bps, in a sign of nerves spreading to other highly indebted countries.

Italy’s 10-year bond yield was up 3 bps at 4.065%.

Some strategists believe markets are getting ahead of themselves.

“These French election jitters, quite frankly it’s overdone,” said Piet Haines Christiansen, chief strategist for fixed income research at Dankse Bank.

He said France’s structural problems were unlikely to be made better or worse by the election outcome and expected the yield spread to tighten somewhat.

Markets barely budged in response to data showing French and Spanish inflation cooled in June.