Source of ‘spread’ in Irish and French bonds

Uncertainty hangs over France as Marine Le Pen’s candidacy disrupts the status quo

Marine Le Pen, French National Front leader, launches her presidential campaign in Lyon on Sunday. Photograph: Robert Pratta/Reuters

Marine Le Pen, French National Front leader, launches her presidential campaign in Lyon on Sunday. Photograph: Robert Pratta/Reuters

 

At the height of Ireland’s financial crisis, in July 2011, those who could stomach buying 10-year Irish bonds were getting a 14 per cent yield – almost 11 percentage points more than they were getting to invest in similar French debt.

The difference has since narrowed sharply, after the State exited its international bailout and, most importantly, the European Central Bank started to buy euro zone government bonds by the bucketload two years ago.

Irish 10-year bond yields have quadrupled since the end of September to about 1.21 per cent, reflecting a broad move by bonds globally amid signs that we are past the peak of extraordinary efforts by central banks globally to boost inflation and economic growth.

The US federal reserve is set to pick up the pace of rate rises this year while there’s a growing view that the ECB will signal in the second half of this year how it will wind down quantitative easing.

While this wider theme is playing out, the differential – or what bond traders like to call the “spread” – in Irish and French bond yields has narrowed to less than 0.09 percentage points.

French concerns

It’s less about Ireland’s move from peripheral outlier to a “core” player in the European bond markets and more down to mounting concerns about the outcome of the upcoming French presidential elections.

With right-wing politician Marine Le Pen currently leading in the polls, even if she is still unlikely – according to most projections – to beat independent candidate Emmanuel Macron in a run-off vote in May, investors are taking note of her every utterance, and those of her advisers.

The National Front leader would take back control of the central bank and take France out of the euro if she wins in May, her economic adviser Bernard Monot told Bloomberg over the weekend.

“I don’t think it will be a catastrophe because France is, after all, a major country and people will understand soon enough that we are working as patriots to restore France’s sovereignty,” he said. “If it is a catastrophe, I have a plan – it’s in here,” he said, pointing to his head.

Gulp.