OAT: Desks Note Varying Degrees Of Widening Risks For OATs
Aug-27 07:26
The well-documented political situation in France has provided headwinds for OATs this week, with a focus on wider cross-market moves as the likes of Italy and the Iberians remain on a more favourable fiscal/credit rating trajectory when compared to France.
- Commerzbank maintain their call for full convergence in BTP/OAT 10- & 30-Year spreads. Looking ahead, they note that “rating risks will certainly become more relevant. Special focus is on Fitch's review (AA; Outlook Negative), which is scheduled for 12 September and will be the first of the autumn rating reviews for France. The review could already take the confidence vote into consideration. While downgrade risks have clearly risen, we expect Fitch to remain put, even if the Bayrou government fails, as the agency already expected new elections in H2 2025 in a report from March”.
- Meanwhile, Goldman Sachs “see reasons to expect only muted volatility in OATs in coming weeks. Those include a favourable Euro area risk backdrop, a reasonable relative valuation of OATs against peers, pessimistic debt consolidation expectations for France, and a narrow range of - at least monetary - policy paths”.
- Still, they warn that “fresh parliamentary elections present a key risk”…“they could take spreads against Bunds wider than the 85bp reached around the fall of the Barnier government last year, when elections were not a possibility”. However, they note that as “elections are not the only possibility at this stage, we maintain our end-year target of 70bp for the 10-Year OAT/Bund spread”.
- UBS have recommended shorting 10-Year OATs vs. swaps (targeting 85bp) but struggle to “see a more material widening of OAT/EGB spreads. Investors have a much better understanding of the complexity of the budget process compared to a year ago. France also has constitutional safeguards to prevent a US-style shutdown. Furthermore, the French bond market remains very liquid with a long maturity profile and a steep yield curve”.
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