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[LONDON] Investor uncertainty about France's presidential election took its toll on French bonds on Monday, pushing up the premium investors demand for holding French over German government bonds to its highest in almost four years.
The move came after far-right National Front leader Marine Le Pen launched her presidential bid, vowing to fight globalisation and take France out of the euro zone.
French 10-year bond yields rose to 17-month highs while nervous investors pushed yields on top-rated German bonds to their lowest level in almost two weeks.
German bonds, perceived as one of the safest assets in the world, also benefited from US political risks and uncertainty about the timing of the next US rate interest hike after Friday's jobs report pointed to tepid wage growth.
Buoyed by the election of President Donald Trump in the United States and by Britons' vote to leave the European Union, Le Pen's anti-immigration, anti-EU party is seeking to tap into similar voter dissatisfaction in France.
Le Pen laid out her presidential election manifesto at the weekend, pledging to curb migration drastically, take France out of the euro zone and hold a referendum on EU membership.
France would default on its sovereign debt if it unilaterally converted its euro-denominated obligations into new francs following a Le Pen victory, a senior executive at ratings agency Standard & Poor's told The Economist.
Le Pen's strong showing in opinion polls has rattled investors at a time when conservative Francois Fillon, once the favourite to win presidential elections in April and May, is embroiled in a scandal over salary payments to his wife. Rising centrist star Emmanuel Macron, meanwhile, is as yet untested.
In contrast, Germany's benchmark 10-year Bund yield fell 4 bps to 0.38 per cent, briefly pushing the French/German yield gap out to 73 basis points - its widest level in almost four years.
Deutsche Bank said the risk for markets is in the first round of voting.
Both Fillon and Macron are expected to win if they go head to head with Le Pen in the second round, but the outcome is uncertain if Socialist party candidate Benoit Hamon makes it through and faces Le Pen.
Polls suggest Le Pen will win enough votes to go through to the second round of voting, but the overall margin between Fillon, Macron and Hamon is just 5 percent.
Most other euro zone bond markets were mixed, with "core" or higher-rated bond yields falling with German yields, while riskier peripheral yields rose.
Italian and Portuguese bond yield spreads over German widened to multi-year highs, while the Irish/German 10-year yield gap was at its widest since last June at 80 bps. "You could say markets are a bit edgy about the political scene in Europe, the political scene in the US and there's a bit of uncertainty about when the Fed will hike rates next,"said Orlando Green, European fixed income strategist.