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The yield gap between French and German two-year debt has blown out to its highest level since the eurozone crisis as investors snap up German assets ahead of France’s presidential elections in three weeks’ time.

The two-year spread – a measure of the premium investors demand to hold French over German debt – has hit 47 basis points (0.47 percentage points), surpassing the 42bps reached during the height of jitters about Marine Le Pen’s chance of victory in France’s presidential elections and the widest since the bloc’s debt crisis abated five years ago (see chart above).

The spread has swollen from 26bps just 10 days ago, a move that stands apart from a narrowing in the 10-year spread – usually considered a more traditional stress in the government bond market. France’s benchmark spread with Bunds has fallen back from a peak of nearly 80bps in February to around 66bps.

Yields on Germany’s “Schatz” debt have been driven to record negative lows as the European Central Bank has begun buying the debt this year as part of its landmark stimulus measures (yields fall when a bond’s price rises).

Meanwhile, French two-year yields have doubled from lows of 0.6 per cent in the summer of 2016 to around 1.8 per cent in February. French debt fell sharply earlier this year when one-time favourite for the French presidency, François Fillon, was hit by an embezzlement scandal, bolstering the chances of far-right rival Ms Le Pen.

The unprecedented rally in short-term German debt – where yields have plumbed to as low as -0.95 per cent – has also led to head-scratching among senior officials at the European Central Bank.

Benoît Cœuré, one of six executive board members at the ECB, yesterday noted the sharp decoupling between yields on the high-quality German short-dated bonds and market swap rates (more on that from Alphaville’s Izzy Kaminska here).

Among some of the explanations, Mr Cœuré stressed the role of non-eurozone investors in driving up prices for prized German bonds in a world where the ECB has cut its deposit rate below zero.

“[Non-euro] investors without access to the Eurosystem’s deposit facility are typically forced to park excess liquidity in the most liquid and safest available storage facility, most often in bonds issued by the safest sovereigns”, said the French central banker in a speech in Paris.

Data from the ECB shows overseas investors account for 90 per cent of the short-term German debt markets – up from 70 per cent two years ago when the central bank began its stimulus programme (see below).

Other factors ramping up demand for short-dated debt include regulatory changes since the financial crisis, investors’ “haven” trades in times of political uncertainty, and a general dearth of safe assets.

“We see growing demand chasing declining supply”, said Mr Cœuré, adding that governments across the eurozone have moved to issue more longer dated debt to lock in historically low borrowing costs.

EXCLUSIVE-French mobile maverick aims for quarter of Italian market - Reuters News

04-Apr-2017 10:31:46

* Iliad to launch in Italy in late 2017 or early 2018

* French company aims for 25 pct of Italian market - sources

* Free Mobile took 18 pct of French market in four years

By Mathieu Rosemain, Sophie Sassard and Agnieszka Flak

PARIS/LONDON/MILAN, April 4 (Reuters) - French telecoms

company Iliad <ILD.PA> is aiming to grab a quarter of the

Italian mobile market using the same cut-throat prices and

straightforward contracts that conquered France, two sources

familiar with its plan told Reuters.

Iliad's launch in Italy later this year or early 2018 is its

first international foray besides a failed $15 billion bid for

T-Mobile US and will be a significant test for the French

company's billionaire founder and majority owner Xavier Niel.

Iliad's Free Mobile brand met with almost instant success in

France thanks to prices anywhere from 50 percent to 80 percent

lower than those offered by established players, companies that

Niel accused publicly of ripping off consumers.

Niel reckons Italian consumers will be thirsty for change

too, telling analysts in March that the country's mobile

companies were the "most-hated" in Europe - a view based on an

annual survey conducted by Exane BNP Paribas.

The 2017 survey of customer perceptions showed that out of

Europe's five biggest economies, Italians were the least

satisfied with their mobile phone rates and their networks.

Iliad believes that by slashing prices, it can win 10

percent of the Italian market in its first two to three years,

and ultimately reach 25 percent, one of the sources said.

In France, Free Mobile won 18 percent of the market in four

years and had 12.7 million customers by the end of 2016. Rivals

cut prices to keep up, which has resulted in a 41 percent drop

in overall average revenue per user (ARPU) in France over the

past six years, according to estimates by GSMA Intelligence.

BIG SPLASH

Free Mobile is also planning to seduce Italians with simple,

transparent offers with none of the hidden costs sometimes seen

in Italy, such as pre-paid monthly contracts running for 28 days

instead of 30, the sources said.

"They need to make a big splash", Exane BNP Paribas analyst

Agathe Martin said. "Why not offer a free-of-charge contract to

start with, why not offer the first six months for free?"

Free Mobile made unlimited texts and calls the new norm in

France and Berenberg analyst Nicolas Didio said they would be

revolutionary in Italy.

"I am convinced Iliad will succeed," he said. "They are very

good at identifying gaps in the market and they'll pounce on

rivals' weaknesses, leveraging customers frustration and

addressing it with high-impact marketing campaigns."

Italian mobile operators Telecom Italia <TLIT.MI>, Vodafone

<VOD.L> and Wind Tre, which each control a third of the market,

are getting ready for a fight.

Incumbent phone companies in Europe have long complained

that EU rules prevent them from consolidating and investing in

high-speed networks, and the prospect of Niel muscling in could

make life harder.

However, Brussels proposed a reform last year which aims to

give incumbents incentives to spend more, such as allowing them

to invest together in exchange for relaxing rules that force

incumbents to open up their networks. [nL8N19H0H8] [nL8N1BJ1E1]

With Niel now on the horizon, Italy's biggest phone company

Telecom Italia is launching no-frills provider Kena Mobile for

clients to pay "only for what they need" as it seeks to protect

the premium positioning of its main TIM brand.

"We are ready ... counter-attacking with a second-brand

strategy on the cost-conscious segment, while TIM is

accelerating on convergence and quality," Telecom Italia Chief

Executive Flavio Cattaneo has said.

Vodafone Chief Executive Vittorio Colao recently told

reporters the British company took Iliad seriously and "has

prepared well". The company declined to comment for this story.

"The Italian telecoms market is already among the most

competitive in the world and we are used to the pressure on

prices," Wind Tre CEO Maximo Ibarra said in March.

"We are not worried ... although we don't want to either

underestimate nor exaggerate the impact of another competitor."

STARTING FROM SCRATCH

While Iliad has yet to take on a major developed market

outside France, Niel has invested personally in telecoms firms

in several countries, including Israel, Switzerland and Monaco -

with varying degrees of success.

Golan Telecom won 10 percent of the Israeli market with its

rock-bottom prices but regulators failed to approve a network

sharing plan, the company teetered near bankruptcy and Niel was

eventually forced to sell up. [nL5N1ET18W]

Niel also acquired Orange Switzerland, rebranding it Salt,

but taking on Swisscom <SCMN.S> has not proved to be easy and

Niel recently said Salt would be no a "Swiss Iliad".

Iliad's doubters say the conditions in Italy won't be as

benign as they were in France when Free Mobile launched in 2012.

In France, Free Mobile's arrival wiped out nearly 50 percent

of its rivals free cash flow (FCF), according to Raymond James

analyst Stephane Beyazian, forcing them to slash costs to adjust

to lower prices as they desperately sought to retain customers.

However, prices in France were twice as high as they are in

Italy now so Iliad's impact might be different, said Beyazian.

Italy is already dominated by low-margin, pre-paid

contracts, whereas nearly all French mobile consumers have

monthly subscriptions.

Also, unlike in France where Iliad was known for its

fixed-line services, Niel will be starting from scratch in

Italy.

Iliad will only start with mobile offers at first in Italy,

the sources familiar with the company's plan said, with

broadband products set to come later.

"It's not unreasonable to expect that Iliad will get good

market share, but you don't know how long it's going to take

them, or what it will cost them," said David Marcus, chief

executive at U.S.-based Evermore Global Advisors, which had a

0.11 percent stake in Telecom Italia at the end of 2016.

Finally, the French company lacks a distribution network in

a country where an anti-terrorism law requires SIM card owners

to be identified with an ID card, creating an additional hurdle

to getting new customers.

A spokeswoman for Iliad declined to comment.

SPECTRUM DEAL

Still, Iliad's profit margins are at their highest level

since Free Mobile's launch, despite having invested more than

1.2 billion euros ($1.3 billion), and the company is confident

it can grow fast and make profits in Italy.

Iliad said it would spend about 1 billion euros on network

spectrum. Half the frequencies will come from CK Hutchison

Holdings <0001.HK> and VEON <VEON.O>, which had to sell them to

get approval for merging their Italian units 3 Italia and Wind.

Iliad hopes it will be able to expand quickly without

spending much initially, as its spectrum deal with Wind and 3

Italia means it will only pay if it gets clients, said Berenberg

analysts.

The French firm is also factoring in the fact that many

Italians have more than one SIM card, which means the average

revenue per user data does not reflect the true size of the

opportunities in Italy, said the second source.

But whatever the price, Iliad will have a hard time in Italy

if it fails to offer a good service, some consumers say.

"I travel a lot with my job so good network coverage is more

important for me than price.", said Giacomo Bianchi, a

businessman in Milan. "Would I consider Free? I always look at

any provider that comes in, but they would have to offer more

than just cheaper fares to get me to switch again."

($1 = 0.9314 euros)

After two years of sometimes tense negotiations, Universal Music Group has reached a long-term deal to have its songs streamed on Spotify, The Post has learned.

The deal between the largest music label and the No. 1 music streamer was reached recently and is only waiting for the chief executives of both companies to sign off on it, several sources confirmed.

The deal is crucial for Spotify, with 50 million paid subscribers worldwide, as it puts the company, currently valued at $8.5 billion, on a firmer track to go public in 2018.

Universal and Spotify had been operating on a month-to-month basis.

The deal was a long time coming because Spotify had been looking to increase its profitability by convincing labels to take a smaller bite out of its revenue stream.

Under current deals, recorded music companies take 55 percent of Spotify revenue — while music publishers take another 10 percent to 12 percent.

Music labels hadn’t wanted to roll back fees without getting something in return. It is believed that Spotify was successful at winning a lower-revenue take by Universal — but only if it hits certain paid-subscriber growth targets.

Artists such as Taylor Swift, distributed by Universal, had said they were unhappy about the music being given away for free.

Spotify may have been successful in winning a lower revenue take by Universal because it offers labels a well-established independently owned streamer that pays hundreds of millions of dollars to the labels each year — while other players are dominated by Silicon Valley tech companies.

Record companies get paid a rate of 5 cents per 100 plays. Top streamers such as Ed Sheeran can notch 50.7 million streams in a week.

While Universal is believed to have agreed to take a lower slice of revenues, Sony is yet to yield to Spotify’s desire to receive cut-price royalty rights, sources said.

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