(News Bulletin 247) – The rate gap on the ten-year bond between France and Germany is narrowing quite significantly this Monday morning.

Tensions on French debt rose again at the end of last week, ahead of the first round of the legislative elections. A sign that investors were nervously awaiting the election.

However, the market eased the pressure on the French signature a little this Monday after the results of the first round of the legislative elections announced on Sunday evening.

The yield on the French 10-year bond fell by three basis points (0.03 percentage points) on the secondary market, where investors trade debt securities among themselves, to 3.27%, according to Bloomberg data.

The spread with the ten-year German yield, which serves as a thermometer to measure the stress on French debt, is narrowing significantly. The yield on the German 10-year bond increases by four basis points. As a result, the spread narrows to 73 basis points, whereas it had reached 84 basis points on Friday.

Not the worst case scenario for the market

Investors put the risk into perspective after the results of the first round published Sunday evening. “The first round of the French elections may have given the far right a slightly less convincing victory than the latest polls suggested, and with other parties now looking set to form alliances in the second round, this should further reduce the far right’s chances of obtaining an absolute majority” in the National Assembly, underlines Deutsche Bank.

If the National Rally (RN) came clearly in the lead in the first round of the legislative elections, the seat projections – which should be taken with caution due to the uncertainty linked to the presence of a very large number of triangulars in the second turn – do not necessarily grant him an absolute majority in the Assembly. In addition, several leaders of other parties announced the withdrawal of candidates in constituencies where they came third, so as to prevent the RN from obtaining an absolute majority.

Which reinforces the scenario of a National Assembly without a majority after the second round of the legislative elections, next Sunday.

“In terms of market reactions, last night’s vote is not the ‘worst case scenario’ (anticipated majority of the RN or the New Popular Front) of the first round, but that of the ‘least worst’. The CAC 40 and the euro should logically experience volatility throughout the week before the second round,” judges John Plassard, of Mirabaud.