Despite blowing out this week to levels rarely seen since the euro zone sovereign debt crisis of 2012, the yield gap between French and German government debt could widen still further in coming weeks, according to analysts.
"In spite of being close to the widest levels seen since 2012, the two-year and 10-year France-Germany spreads are pricing in a low probability of a Le Pen victory, in my view. I think the probability being reflected in this spread is too low compared to the tighter first round result that polls suggest," Antoine Bouvet, rates strategist at Mizuho International, told CNBC via email on Thursday.
The spread - used as a "fear gauge" by investors ahead of the French elections - has closely tracked political developments in recent months, narrowing as the risk of a victory for a candidate perceived to be 'market-unfriendly' is viewed to have ebbed and vice versa. Specifically, after several months of spreads sitting at elevated levels versus historical norms, the yield differential shrank alongside the swelling of momentum for centrist candidate Emmanuel Macron during February and then rose once again following last week's surge by far-left newcomer rival Jean-Luc Mélenchon after a notable performance by the latter in two recent televised debates.
Indeed, an average of the latest opinion polls from five closely watched providers (as compiled by Berenberg) demonstrates a tightening of the four-horse field with Mélenchon rising to just over 18 percent in opinion polls, trailing marginally behind scandal-hit Republican candidate François Fillon on 18.8 percent and only a handful of points short of Macron on 23.1 percent and Le Pen on 23.5 percent.
"For France, Europe and markets, a run-off between Mélenchon and ultra-right Marine Le Pen on 7 May would be a choice between bad and ugly," according to Holger Schmieding, chief economist at Berenberg, in a note to clients on Thursday, who attributes a 10 percent likelihood each to the odds of either Le Pen or Mélenchon becoming the next French president.