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Sovereign Bonds
France asks bondholders to take a long-term view
Country will tap an existing 50-year bond that matures in 2066
JANUARY 4, 2017by: Elaine Moore in London and Michael Stothard in Paris
France is asking bond investors to take the long view in what is expected to be a
challenging year for the eurozone’s second-largest economy, as the country
braces for a bruising presidential election.
On Thursday, France will tap an existing 50-year bond that matures in 2066, in
the latest sign that investors are still willing to prioritise higher yields amid low
global interest rates and in spite of a sharp uptick in market
(http://next.ft.com/content/62ea5630-bd68-11e6-8b45-b8b81dd5d080)
volatility
(http://next.ft.com/content/62ea5630-bd68-11e6-8b45-b8b81dd5d080)ahead of France’s spring vote.
The spectre of rising populism in Europe has led investors to question whether
France’s far-right, anti-euro candidate Marine Le Pen
(http://next.ft.com/content/adddaea8-b53e-11e6-961e-a1acd97f622d)might
echo Donald Trump’s surprise win in last year’s US election, adding to the litany
of recent political upsets.
According to the latest polling data, Ms Le Pen could win the initial round of
voting, although she would then be beaten into second place in the run-off as
moderate voters rally against her, according to these same polls. The favourite
for the election is François Fillon of the centre-right Republicans.
“We have seen speculators and hedge funds using futures to take views on
political uncertainties,” said Olivier De Larouziere, head of interest rates at
bonds for a while. It’s not just in France that bond yields are rising, but everyone
is talking about France because of the political situation.”
However, Anthony Requin, chief executive of Agence France Tresor, which
manages French government debt, said the chance of a Le Pen victory was not
regarded as a “mainstream scenario” by the country’s financial sector.
Regardless of the political turbulence, demand from domestic and overseas
investors, particularly in Japan, would support the country’s borrowing plans
this year and its sale of ultra-long dated debt, he said. “We are following advice
from primary dealers. There is appetite.”
Until recently, ultra-long government bonds were a rarity. Central bank policies
to reduce borrowing costs via bond-buying schemes have changed the playing
field, pushing investors to buy increasingly longer-dated debt in search of higher
yields.
Last year, eurozone countries raised €19bn of debt with maturities of 40 years
or more, up from just €1.3bn the previous year. Two countries, Belgium and
Ireland, also sold 100-year bonds
(http://next.ft.com/content/bc6f3e00-0ba7-11e6-9456-444ab5211a2f)at the behest of a small number of investors.
Mr Requin says France was also approached to issue a 100-year bond, but
declined on the grounds that demand did not appear sufficiently strong to
warrant a new maturity.
Banks expect smaller sums of ultra long-end debt issuance this year, with UBS
strategist Nishay Patel pointing out that the historic low bond yields which
drove the boom have already given way to a bond sell-off.
Mr Trump’s election victory in early November amplified
(http://next.ft.com/content/32d4aaea-a5a8-11e6-8b69-02899e8bd9d1) this
existing trend, leading to an increase in bond yields that spilled across the rest
of the world, as investors bet on increased government spending and lower taxes
However, the increase in French borrowing costs has exceeded the European
benchmark — with the bonds trading more like those of Europe’s indebted
southern periphery than a core eurozone economy.
The yield on 10-year French bonds traded at the widest levels to German Bunds
in three years by late 2016 and remain double the levels they were last spring.
Yields increase as bond prices fall.
Mr Requin at the AFT said domestic demand had remained strong throughout
the year, as had continued demand for long-dated French bonds from investors,
particularly those in Japan.
“The spread widening has been receding recently,” he said. “And the general
situation in the French economy is improving.”
Following Japan’s decision to adopt negative interest rates and cap the yield on
benchmark 10-year Japanese bonds at zero
(http://next.ft.com/content/bcdeb746-ac8b-11e6-9cb3-bb8207902122),
more foreign bonds in 2016 than they have for a decade, according to the
Ministry of Finance, including €28bn in net purchases of French bonds.
Isabelle Vic-Philippe, head of euro government bonds at Amundi, said concerns
about France’s political situation had caught investors out in the past.
“Political risk is already noticeably priced in,” she said. “Last time we had
similar political concerns the spread narrowed from around this point.”
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Elaine Moore
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