Renewed fears over the chances of far-right Marine Le Pen winning the French Presidency have pushed the gap between French and German benchmark government bond yields to its widest since 2012.
The Franco-German 10-year yield spread widened above 80 basis points on Monday as Le Pen, candidate for the nationalist National Front, continues to benefit in polls.
Demand for French government debt has been hit by fears of Le Pen winning the election. The yield on the French 10-year bond has risen by 29 basis points since the start of the year, compared with only a two basis point rise for the equivalent German note.
Meanwhile the yield on the German two-year bond hit record lows as investors continue a flight to quality. Yields move inversely to prices.
Chris Bailey, European strategist at Raymond James, says "people are adjusting their probabilities" for a Le Pen victory, despite the fact that risk of a French default remains very low. "Some of the bond spreads have been used as a proxy" of political risk.
Le Pen has vowed to hold a referendum on membership of the euro, which could spark a renewed Eurozone crisis, and lower demand for bonds from at-risk nations.
A daily poll by OpinionWay shows Le Pen winning the first round with 27 per cent of the vote and gaining ground in the second-round run-off vote against centrist independent, Emmanuel Macron.
Jasper Lawler, senior market analyst at London Capital Group, says spreads on Franco-German debt could widen further: "The pattern of polls lulling markets into a false sense of security before suddenly turning and causing hysteria is becoming a familiar one."
Macron has risen to become favourite to join Le Pen in the run-off after the campaign of Republicains party candidate Francois Fillon was hit by scandal.
He has been comfortably ahead in most polls of a head-to-head battle, although that gap has narrowed to 16 per cent after peaking at 32 per cent, with more than two months to go before the first round of voting on 23 April.
Macron, a former member of the ruling Socialist party who has never been elected to office, has seen his poll ratings dip after heavily criticising France’s colonial past in Algeria.
Macron’s centrist platform had been seen as the main beneficiary of the Fillon scandal, which dented his appeal on a traditionalist platform that emphasised his moral standing.
The right-wing candidate has seen his poll ratings plummet since a French satirical newspaper alleged his Welsh-born wife, Penelope Fillon, had received €800,000 for work which was never carried out.