BOND REPORT: French-German Yield Spread Narrows Sharply As 'Frexit' Fears Abate

By Sara Sjolin, MarketWatch Features Dow Jones Newswires

10-year U.S. yield rises to 2.3%

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Borrowing costs in France fell sharply on Monday after a first-place finish by centrist candidate Emmanuel Macron in the first round of voting in the French presidential election eased fears of a eurozone breakup.

The yield on 10-year French government bonds , or OATs, dropped 7.7 basis points to 0.849% to trade around the lowest level since January, according to Tradeweb data. Yields and bond prices move in opposite directions.

That helped the closely watched yield premium that investors demand to hold French bonds over benchmark German government paper to narrow to 49.80 basis points, or 0.49 percentage points, the lowest since December. The spread had widened to around 75 basis points ahead of Sunday's ballot on concerns that right-winger Marine Le Pen and left-winger Jean Luc Melenchon--both euroskeptics--would come out on top in Sunday's presidential vote.

Both candidates had vowed to put France's EU membership up for a referendum, stoking fears of a so-called Frexit and the beginning of the end of the eurozone.

Le Pen came in second in Sunday's ballot, qualifying for a runoff on May 7 against Macron. Polls indicate Macron will win the second and final round of voting, setting him on course to become France's next president.

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"With Macron heavily favored in head-to-head polling against Le Pen, it seems most likely that the negative market scenarios--priced in over recent weeks--will recede between now and the runoff," said Timothy Graf, head of EMEA macro strategy at State Street Global Markets, in a note.

"As volatility subsides, spreads between French and German yields should narrow and we look for the euro to build on its recent stability against the dollar," he added.

Read:4 things investors need to know about France's presidential runoff (http://www.marketwatch.com/story/4-things-investors-need-to-know-about-frances-presidential-runoff-2017-04-23)

The euro jumped to an intraday high of $1.0901, its highest trading level since November (http://www.marketwatch.com/story/euro-jumps-to-5-month-high-in-french-election-relief-rally-2017-04-24).

U.S. Treasury yields on the other hand moved firmly higher as investors parked in haven investments returned to risky assets like stocks after geopolitical jitters over the French Presidential Election appeared to settle down.

The yield on 10-year notes rose 4.6 basis points to 2.294%, while 2-year yields climbed 5.3 basis points to 1.242%. The yield for the 30-year Treasury, or the long bond, rose 3.3 basis points to 2.939%.

Traders are looking ahead to manufacturing data from the Dallas branch of the Federal Reserve at 9:30 a.m. Eastern. The Chicago Fed's National Activity Index, or the CFNAI, fell to 0.08, a sharp drop from March's reading of 0.27. A measure of overall economic health, any number above zero indicates growth above-trend.

Minneapolis Fed President Neel Kashkari, a voting member of the interest-rate setting committee of the central bank, will talk in a moderated discussion held at UCLA in Los Angeles at 11:30 a.m. Eastern.

(END) Dow Jones Newswires

April 24, 2017 09:42 ET (13:42 GMT)