london<u+2014>investors are dumping french government bonds five months ahead of the country<u+2019>s presidential election, in another example of how politics is upending global markets. the steep fall in the price of french bonds comes amid a wider selloff in government debt following the election of donald trump. but french debt, and that of some other european nations, is being particularly punished ahead of a series of key votes in the eurozone , moves that are opening up old fault lines in the region<u+2019>s sovereign bond market. mr. trump<u+2019>s victory and the u.k.<u+2019>s june vote to leave the european union took markets by surprise and many investors don<u+2019>t want to take risks, even months ahead of the elections. high on the list of political concerns is france<u+2019>s spring vote, where an upset could result in victory for<u+00a0>marine le pen, a<u+00a0>far-right candidate who has threatened to pull europe<u+2019>s second-largest economy out of the euro. that is adding to pressure<u+00a0>on the currency, which is hovering around its<u+00a0>lowest level against the dollar since march 2015. french bonds are trading at their lowest level against benchmark german debt since early 2014, with the gap in yield now 0.55 of a percentage point, up by 0.33 of a percentage point since early september, according to tradeweb.<u+00a0>yields rise as prices fall. <u+201c>the<u+00a0>market was twice bitten, third-time shy<u+2026>first with brexit, then trump,<u+201d><u+00a0>said james athey, a fund manager at aberdeen asset management. investors <u+201c>looked at marine le pen and [her] chances in the french election and said: no, there<u+2019>s not enough risk priced there,<u+201d> he said. the french election is one of a series of eurozone votes that are spooking investors, including<u+00a0>a dec. 4<u+00a0>referendum in italy that<u+00a0>could lead<u+00a0>to<u+00a0>the ouster of<u+00a0>the current reform-minded government. as investors sell,<u+00a0>familiar<u+00a0>cracks are appearing<u+00a0>in eurozone debt markets. bonds from so-called peripheral nations, like italy and portugal, are being hit harder than those in the sturdier <u+2019>core<u+2019><u+00a0>economies, like germany. french debt has typically traded with the core, but its bonds are now also in the firing line. of course, markets haven<u+2019>t always acted as predicted following recent upsets, with equity and peripheral bonds quickly recovering<u+00a0>from the selling that followed brexit and shares even rallying after mr. trump<u+2019>s victory. moreover, some analysts believe the ecb<u+2019>s bond buying program acts as something of a backstop on further declines. on sunday, voters will choose the presidential candidate for the french center-right party les<u+00a0>r<u+00e9>publicains. polls and bookmakers<u+00a0>widely predict<u+00a0>sunday<u+2019>s<u+00a0>winner to beat ms. le pen of the far-right<u+00a0>front national<u+00a0>in the runoff in next<u+00a0>spring<u+2019>s presidential election run. but investors point to the failure of polls and bookies to predict brexit and mr. trump<u+2019>s victory. for markets, a victory for ms. le pen could represent an even more seismic event if she pulls france out of the euro, as she has promised. many lawmakers and analysts believe such a move would deal a fatal blow to the single currency. <u+201c>the risk of a substantial shakedown to the european order<u+2014>far, far bigger than brexit<u+2014>is not one to be dismissed lightly,<u+201d> said paul griffiths, chief investment officer, fixed income and multi asset solutions at first state investments. concern over the future of the euro is putting pressure on the currency and dragging down some government debt. in recent years, government bonds have acted as a barometer for concern over the euro. before 2008, and the financial crisis, borrowing rates across the euro area converged as investors bet the single currency would last. markets deemed greek bonds almost as safe as those from germany. but<u+00a0>during the eurozone<u+2019>s 2010 to 2012 sovereign debt crisis, the spread between riskier southern european and german bonds ballooned as investors priced in a greater probability that these countries would leave the euro. the european central bank ended that crisis by vowing to safeguard the euro<u+2019>s future, driving bond spreads back down. since 2015, its massive bond-buying program has reduced those spreads further. but spreads are on the move again. italian bonds have been particularly hard hit ahead of its referendum, with the spread against 10-year german debt jumping nearly 0.7 percentage point since early september. other eurozone countries<u+00a0>that sold off during previous periods of stress, such as spain, portugal and ireland, have also underperformed. but the selling of bonds from core countries, including austria, germany and the netherlands, has been more muted. the euro<u+2019>s recent decline has much to do with the dollar, which has risen as investors anticipate u.s. interest rate rises. but political risk is also weighing on the currency. <u+201c>there<u+2019>s a lot of potential hiccups for the euro and the worst case scenario from these events is they could question the very coherence of the [european] project,<u+201d> said jane foley, a currency strategist at dutch lender rabobank. write to christopher whittall at christopher.whittall@wsj.com and riva gold at riva.gold@wsj.com
new populist upset? markets say france  - wsj
christopher whittall riva gold