French Debt Risk Premium Narrows as Anti-RN Candidates Step Aside

The risk premium for holding French debt decreased as anti-RN candidates withdrew to block Marine Le Pen's National Rally. Over 200 candidates from the Left Alliance and President Macron's party urged voters to support the best-positioned anti-RN candidate. This strategy aims to limit extreme policy implementations, positively impacting markets.

The risk premium investors demand to hold French debt narrowed on Wednesday as the prospect of Marine Le Pen's National Rally (RN) winning a majority in France's parliament lessened as anti-RN candidates bowed out in a bid to block the far-right. More than 200 candidates from the Left Alliance and President Emmanuel Macron's party confirmed they would step aside from Sunday's election, as they called on voters to select whichever candidate was best placed to defeat the local RN rival.

"The strategy would significantly limit the chances of Le Pen winning an outright majority," Jefferies chief Europe economist Mohit Kumar said in a note. "With both the far right or the far left unable to have the numbers to implement extreme policies, the scenario should be a near term positive for the markets."

France's 10-year bond yield was last down 2.5 basis points (bps) at 3.307%. On Tuesday it hit its highest level since November at 3.373%. The yield spread between French and German 10-year sovereign bond yields - a gauge of the premium investors demand for the extra risk of holding French bonds – tightened to 69.9 bps, its narrowest level in a week.

Germany's 10-year bond yield, the euro area benchmark, was little changed at 2.605%. Italy's 10-year bond yield was down 3.5 bps at 4.041%.

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