Source: Bloomberg

Yields on 5-year TIPS (Treasury Inflation Protected Securities) soared with the euro during the two weeks since the first round of the French presidential election.

That’s an unusual state of affairs. Historically, the Euro exchange rate hasn’t had much influence on the TIPS market. The most consistent relationship in the TIPS market during the past dozen years is with gold (both are hedges against unexpected inflation in the US dollar sector). But these are unusual times.

Hedge funds bought TIPS before the French elections as a hedge against a swing to risk aversion in the event of a Le Pen victory. When Emmanuel Macron came in first with a clear path to victory in the second round, investors sold TIPS and bought euro.