France's Marine Le Pen may be losing election momentum — and investors like it

Marine Le Pen, French National Front (FN) political party leader and candidate for French 2017 presidential election, at a political rally in Saint-Herblain near Nantes, France, February 26, 2017.
Stephane Mahe | Reuters

Marine Le Pen's chances of becoming France's next president may be slipping and investors are breathing a sigh of relief.

A poll released Tuesday by French firm Ifop showed the far-right candidate's lead over centrist Emmanuel Macron declining to just 1.5 percentage points. Another poll released by Opinionway showed Macron defeating Le Pen in the May 7 runoff election. France holds two rounds of voting in presidential contests.

French bond prices rose after the polls, bringing their yields closer in line with more steady German yields. The French 10-year note yield declined to 0.888 percent, narrowing its spread with the 10-year German sovereign yield to around 0.68 percentage point. Bond yields move inversely to bond prices.

French 10-year yield in 2016

Source: FactSet

French debtholders had been selling their bonds out of fear that a Le Pen victory would lead to France leaving the European Union — potentially threatening the future of the EU itself. The French-German spread rose last week to its highest since August 2012.

France's CAC 40 stock index climbed 0.28 percent on Tuesday, slightly outperforming the broader index, which was 0.23 percent higher.

John De Clue, chief investment officer of the Private Client Reserve at U.S. Bank, said the recent sell-off in French bonds may have gone too far.

"We are surprised with the market's concern over a Le Pen victory and how these spreads have widened," he said. "If this gets resolved, I'd say the market turns back to the fundamentals, which have been fairly positive."

The pace of economic growth in the euro zone reached its highest level in almost six years in February, with job creation rising to a 9-1/2 year high, according to IHS Markit.

But can polls be trusted?

The latest batch of polls suggests Le Pen will ultimately lose. That said, political polling recently has been a terrible predictor of actual results. Polls heading into last year's Brexit vote and the U.S. presidential election were mostly wrong, causing shockwaves across financial markets.

"Over the last year, we've learned that anything can happen," said Minh Trang, senior FX trader at Silicon Valley Bank. "But there is a bit more confidence that things won't go awry and remain more stable."