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French yields hit three-month lows as investors shrug off Paris attack
April 21, 2017 / 9:01 AM / 8 months ago

French yields hit three-month lows as investors shrug off Paris attack

* After initial sell off, French govt bonds outperform market

* France/Germany yield spread under 60 bps for first time in April

* U.S. PMIs could put further brake on reflation trade

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

By Abhinav Ramnarayan

LONDON, April 21 (Reuters) - French borrowing costs fell to a three-month low on Friday in the last trading session before the first round of tightly contested presidential elections, focusing on polls rather than the killing overnight of a policeman in Paris.

A poll on Friday pointed to a low likelihood of victory for anti-euro candidate Marine Le Pen - even though conducted before the attack.

“The big question is if the sad news from Paris is going to affect the elections - but I think this is unlikely as the general public is quite used to these kinds of attacks now,” said DZ Bank strategist Christian Lenk.

The gap between French and German 10-year borrowing costs, a key indicator of concerns over the presidential elections in recent months, rose sharply in early trading.

However, this quickly reversed and the yield on 10-year French government bonds was down 3 basis points at 0.83 percent, its lowest since January 18.

The spread over the German equivalent fell below 60 bps for the first time this month, and at 59 basis points was 16 bps off its April peak.

“We have not seen too much of a downside in the market from Paris attacks, and if anything the strong (French purchasing managers index) data this morning has helped settle nerves ahead of the elections,” said Investec economist Victoria Clarke.

French business activity confounded expectations in April by growing at the fastest pace in nearly six years.

While under normal circumstances positive economic news would put upward pressure on yields, French government bonds have a large political uncertainty premium baked into the price and any signs of stability tend to reduce that uncertainty.

Euro zone PMI data was also strong, showing businesses in the bloc increased activity at the fastest rate for six years as new orders stayed robust.

The French/German yield spread fell sharply on Thursday as investors starting taking off hedges put in place to protect against a potential victory for anti-euro far-right candidate Marine Le Pen.

Centrist Emmanuel Macron is set to come out on top in Sunday’s first round of voting as Le Pen fell further behind him in an Elabe poll published on Friday.

The poll was conducted on Wednesday and Thursday.

Market attention may shift to the United States later with Markit’s flash PMI data due out at 1345 GMT. A Reuters poll expects a reading of 53.5, where anything above 50 indicates growth and anything below indicates a decline.

“Recent news of U.S. economic indicators has not been so positive so this could be a very important number, and the focus could shift to the U.S. later today,” said DZ Bank’s Lenk.

Reporting by Abhinav Ramnarayan

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