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Franklin Templeton's Zahn: French bonds may underperform once election euphoria subsides
May 7, 2017 / 8:25 PM / in 7 months

Franklin Templeton's Zahn: French bonds may underperform once election euphoria subsides

LONDON, May 7 (Reuters) - French government bonds are likely to benefit in the short term from centrist Emmanuel Macron’s presidential win, but could underperform over the medium term as focus shifts away from politics, Franklin Templeton’s David Zahn said on Sunday.

Macron was elected president of France on Sunday with a business-friendly vision of European integration, defeating Marine Le Pen, a far-right nationalist who threatened to take France out of the European Union.

“Macron’s widely predicted victory should be positively received by markets, at least in the short term,” Zahn, Franklin Templeton’s head of European fixed income, said in a note.

“However, very quickly, we expect pressure to build on Macron to outline exactly how he intends to govern. So far we have only a very rough sketch of what he’s planning to do.”

Zahn said that much will depend on the results of June’s parliamentary elections, adding that there has been little in Macron’s manifesto that would suggest he could bring down France’s deficit significantly or stem its high debt-to-GDP levels.

“That is not good for long-term French fundamentals. But over the medium term, we’d expect French government bonds could probably begin to sell off once people finally synthesise the full implications of the Macron victory,” he said.

“At the moment, politics are driving the markets. Once investors see through that, I think there could be an underperformance in French government bonds.”

Given that France has a large current account deficit and high debt levels, the gap between French and German bond yields could trade wider, he said. (Reporting by Dhara Ranasinghe; Editing by Angus MacSwan)

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