Chart in focus: political pervasion


Ewan McAlpine, Senior Client Portfolio Manager

1 March 2017

We stated in our update at the beginning of the year that ‘political risk will be a feature of 2017, as it was in 2016.’ The chart below shows that the yield spread (the difference in yield) between French and German 10-year government bond markets has increased. The yield spread is a reflection of risk, and it’s clear that the political risk perceived in France has had the effect of increasing the yield on French government bonds, relative to their German counterparts. 
This difference has increased sharply in 2017, returning to its highest levels since 2012 (following the euro crisis) as political concerns in the run-up to the French elections have discouraged investors from holding French government bonds, while German equivalents retain their ‘safe haven’ status.
After Brexit and Trump, confidence in polls is low. The resurging concerns over Greece, the calendar of elections in Europe and the unfolding of the Brexit are likely to mean that political risk stays high on the European agenda.

We stated in our update at the beginning of the year that ‘political risk will be a feature of 2017, as it was in 2016.’ The chart below shows that the yield spread (the difference in yield) between French and German 10-year government bond markets has increased. The yield spread is a reflection of risk, and it’s clear that the political risk perceived in France has had the effect of increasing the yield on French government bonds, relative to their German counterparts. 

This difference has increased sharply in 2017, returning to its highest levels since 2012 (following the euro crisis) as political concerns in the run-up to the French elections have discouraged investors from holding French government bonds, while German equivalents retain their ‘safe haven’ status.

After Brexit and Trump, confidence in polls is low. The resurging concerns over Greece, the calendar of elections in Europe and the unfolding of the Brexit are likely to mean that political risk stays high on the European agenda.

Source: Thomson Reuters Datastream.

The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.