Bond markets poised for European discontent

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Spreads between French and German bond yields have widened to levels not seen since the European sovereign debt crisis, raising questions as to how fixed income markets will react to the wave of elections crossing the Eurozone this year.

EdenTree Investment Management’s David Katimbo-Mugwanya warns investors not to be “foolhardy” and assume that the “low probability” parties do not stand a chance, given last year’s outcomes of the Brexit vote and US election.

The fixed income fund manager says with the fragmented state of Dutch politics – with 28 parties listed on the ballot paper – while the far-right and anti-immigration set, PVV, is poised to become the dominant party, several others are still well-placed to form a coalition excluding it.

Yet he says that process was likely to become a “drawn-out affair” for whoever chose to do so.

He says: “How much support this anti-establishment party is able to garner in the election remains key nevertheless.”

Further, France’s first round in its general elections next month see a possible continuation of discontent.

The first round takes place next month, with May bringing the battle between the two most popular presidential candidates.

“Similar to the Dutch election scene, Eurosceptic support for the National Front’s Marie Le Pen has been building.

“Curbs on immigration are also a key plank of her party’s agenda.

“Recent forecasts from the European Commission put France on course to breach the EU fiscal budget deficit guidelines though, currently at a level of 3 per cent of GDP,” he says.

“This would necessitate austerity, the suggestion of which only serves to heighten French discomfort with pro-European leadership.”