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French election scandal and ‘anxieties’ send spreads to a three-year high

ALAIN JOCARD | AFP | Getty Images

A 'radical-left winger' and the fading hopes of the center-right are making investors nervous ahead of upcoming French elections sending 10-year French-German spreads to a three-year high.

The spread peaked out at 72 basis points at around 9 a.m. London time on Wednesday, a level not seen since January 2014.

"The more recent widening of this spread is clearly linked to anxieties over the French Presidential elections in April and the appointment of radical-left winger Benoit Hamon two days ago, together with the possible emerging scandal associated with Francois Fillon's wife as paid-secretary, that together makes the establishment parties chances weaker and the presidential race much more open and uncertain that before," Jan Randolph, director of sovereign risk at IHS Markit, told CNBC via email.

Recent polls suggested that the center-right candidate Fillon was on track to fight against the far-right leader Marine Le Pen in the second round of the election. But revelations that he had misused public funds have seen Fillon's popularity decline. A new opinion poll, released Wednesday by the newspaper Les Echo, showed that Fillon would not make it to the second round.

Furthermore, the socialist party chose last Sunday the most left-leaning candidate it had in the race. The former education minister Hamon defeated the former Prime Minister Manuel Valls.

Vincent Juvyns, global market strategist at JPMorgan Asset Management, told CNBC over the phone that Hamon was "really a left winger", adding that recent developments in French politics have made the outcome of the presidential race less clear.

Juvyns, who is based in Paris, added that the recent scandals involving Fillon had an impact on his popularity and he is now less and less likely to win the Presidential seat.

Le Pen, the leader of the far-right National Front, has also made headlines because she has not paid back EU funds. The European Parliament claimed that Le Pen missed a deadline to repay more than 300,000 euros ($321,000), which she has apparently used to pay an aide in the Paris office. Le Pen has said she has no intentions in paying back the money.

The latest Les Echo poll also showed that Le Pen is set to win the first round with between 26 and 27 percent of the votes.

"A win for far right Marine le Pen, though still less likely but closer than any time before, certainly would (provoke any new action from the European Central Bank)," Randolph from IHS Markit said.

"(Le Pen's victory) would a be nightmare Europe game-changer scenario, much more than Brexit or Trump combined," he added.

However, analysts have told CNBC previously that they expect French voters to unite and support the second candidate in the race against Le Pen in the second round of the elections.

France is due to hold two auctions Thursday, with 2026 and 2031 maturities, Norbert Wuthe, senior analyst, government bond strategy at BayernLB, told CNBC.

"Spreads should have tightened from the level reached at the end of last week," he said. "But with recent developments spread levels have crossed significant resistance levels. But with news/new risks reflected now we see tightening potential vs. Bunds after tomorrow's auctions of about 5 bps."

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