OAT: Commerzbank: OATs Expect French Government To Fall
Commerzbank note that “OATs have probably come to terms with the fact that the government will fall next week. Our base case is that Macron will appoint a new centre-left prime minister who has a better chance of passing a budget with some concessions, which should avert immediate political chaos and uncertainty. Moreover, a look at similar episodes in the past and rating implications also points to more near-term spread relief and we see potential for 10-Year OAT/Bund to tighten back to 70bp”.
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CROSS ASSET: Yen extends losses, Yields are edging higher
- Some broader lows for the yen here, against the USD, EUR, AUD, GBP.
- The best performers in G10 against the Yen are still the NZD closely followed by the Aussie, NZ employment and the earlier Risk On tone have been supportive of both Currencies.
- The US Yield has also played a part, TYU5 makes an attempt at 111.31+, this was Monday's low, but overall this future level is still a 1 big figure away from where TYU5 traded at pre NFP, at 110.28.
- The Long end part of the curves are weighing in Europe and the US, helping tilt the curves on the steeper side.
US TSY OPTIONS: FVU5 109.25 Calls Given
FVU5 109.25 calls 10K given at 0-13.
EGBS: Another Leg Lower For The 10-year BTP/OAT Spread In August
The 10-year BTP/OAT spread has taken another leg lower since the end of July, now just below 14bps for the tightest since 2007. BTPs have benefitted from a continued easing of EUR volatility metrics, which has come alongside a pullback in near-term trade policy uncertainty.
- Benchmark Italian yields already trade below French counterparts at 2- and 5-year tenors.
- A re-intensification of French political risks in the autumn (when the 2026 budget process gets underway) could be a catalyst for the 10-year BTP/OAT spread to also narrow towards 0bps.
- Since his 2026 budget proposals in mid-July, PM Bayrou has faced criticism from opposition parties. There is a strong likelihood that, given the gov'ts minority status, Bayrou will have to push the budget through using Article 49.3 of the French constitution in order to avoid a vote.
- In this light, 65bp level has provided support to the 10-year OAT/Bund spread over the last two weeks.
