Dutch election result: too soon to sound the all-clear

Although the PVV’s prospects had been in decline for some time, the failure of Geert Wilders to win the most seats in the Dutch parliamentary elections ought partly to relieve one the biggest concerns hanging over European fixed income in recent months.

The perceived threat of anti-EU parties assuming power in the continent’s capitals has led government bonds in Europe’s peripheral and ‘semicore’ markets to underperform their ‘core’ market peers.

Paradoxically, this was less evident in Dutch bonds themselves, since the Netherlands’ strong macroeconomic and fiscal fundamentals still make it one of Europe’s better credits. But markets had begun to view the success of Wilders as a harbinger of a swing to the right elsewhere – notably France, whose bond yields rose considerably relative to German bunds.

The decent predictive performance of opinion polls in the Dutch vote is likely to restore confidence in French surveys, which have consistently ascribed a low probability to Marine Le Pen winning the presidential election. We expect to see the France/Germany yield spread compress following today’s result. French yields tightened to German yields by around 4bps in initial trading. The equivalent spread in Italy tightened by 6bps.

It’s probably a little too soon to sound the all-clear, however. Firstly, the Dutch result provides a good example of the breakdown of the traditional centre right / centre left axis in Europe and the increasing fragmentation of the political landscape; while the victorious VVD party will not invite the PVV into government, the traditionally long- winded process of building a coalition is complicated by the collapse of the centre-left PvdA and the diverse agendas of Mark Rutte’s potential partners. Meanwhile, Wilders is likely to remain the dominant – and noisy – critical voice from the opposition benches. This could leave the Netherlands without a stable and strong government at a crucial time for Europe’s future.

And while we’re fairly sanguine about the risk of a Le Pen presidency in France, we retain serious concerns over Italy, where the fragmentation of Matteo Renzi’s Democratic Party risks a prolonged period of political stasis. At best, this is detrimental to the legislation of much-needed structural reforms; at worst it opens the door to parties hostile to the EU and Italy’s membership of the eurozone.

Adrian Hilton – Portfolio Manager, Fixed Income – Columbia Threadneedle Investments.