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Did investors really learn nothing from Trump and Brexit?

In this Sept. 18, 2016, file photo, France's far-right National Front president Marine Le Pen waves to supporters during a summer meeting in Frejus, southern France.

Claude Paris/AP

Brexit and Donald Trump didn't make it clear enough, political risk is back with a vengeance.

Except in France. Investors appear to be giving a very Gallic shrug to the risk of far-right leader Marine Le Pen pulling off a surprise victory in next year's presidential election.

After hitting the widest since June 2015 last week, the difference in yield between French government bonds and German bunds of a comparable maturity has narrowed a bit. That relief may not last.

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A Le Pen victory is an unlikely outcome. While she might come top in the first round of voting in April, opinion polls show she would trail her opponent in the second round the following month. Pollsters tell Bloomberg News they're confident they're right.

But both Brexit and Trump were seen as unlikely -- once. Whatever the final outcome, the way her campaign waxes and wanes in coming weeks still has the potential to move bond markets.

Yields on French government bonds have climbed in recent weeks, as this chart shows. But that's largely the result of the rout that's hurt all fixed-income markets.

Compared with Italy, where Prime Minister Matteo Renzi looks set to lose a referendum on constitutional reform on Dec. 4, they've hardly moved at all. Mr. Renzi's said that he'll quit if he loses, and if that happens investors are braced for instability to follow. In addition, France is still deemed a core market, with most of the region's sovereign risk still residing in the periphery.

Two things may change investors' view on the perceived risk. The first is who Les Republicans pick as their candidate this weekend. Polls show former Prime Minister Alain Juppe would beat Ms. Le Pen by a much wider margin than former President Nicolas Sarkozy.

Second, Ms. Le Pen is likely to be one of the two candidates who make it through to the second round. Investors may take fright when it becomes a two-horse race -- even though when her father made the runoff in 2002, he lost to Jacques Chirac in a landslide.

Thursday sees this year's last sale of medium-dated French government bonds and index-linked securities. Then there's a final mixed auction in December, when primary dealers tender for what they want. Then that's it for issuance this year.

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Domestic buyers may be attracted by the increased yield and look prepared to overlook the political threat for now. They may be also be taking some comfort that the European Central Bank's bond purchases will pick up some slack, though equally they'll have to contend with the prospect that the central bank may start tapering next year. That could leave fixed-income investors higher and drier than they otherwise would be.

Either way, they should be prepared for further movement in French government bonds as the election race enters its final furlongs. Complacency at this point would be unwise.

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Marcus Ashworth is a Bloomberg Gadfly columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

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