FRANCE AUCTION RESULTS: MT OATs

• The US dollar is weaker again on Tuesday, continuing the theme that played out across Monday’s session. The USD index has extended the week’s decline to 0.7% in a broad greenback move, however, the advance for the Japanese yen has been most notable as we approach the holiday season.
• The yen received a significant boost from finance minister Katayama’s comments on Monday, who provided the most forceful warning of intervention in recent times, stating that the MoF have a ‘free hand’ to take bold action on the currency. This backdrop has kept pressure on USDJPY, which at its lowest level this morning has erased around 210 pips from last Friday’s close. Indeed, the latest acceleration lower was likely tied to the pair sinking through the BOJ press conference lows at 155.85, further pressuring short-term longs.
• Additionally, PM Takaichi may have exacerbated this morning’s price action, providing another angle of yen optimism through her communication that she will not implement irresponsible tax cuts or bond issuance, allaying fiscal concerns somewhat.
• Finally, the technical angle has also assisted the pullback, with last Friday’s rally falling just 10 pips shy of key resistance at 157.89, the Nov 20 high and a bull trigger. Given the volatile moves in recent sessions, the most notable support lies at 154.40, the 50-day EMA. A clear breach of it would undermine the bull theme and signal scope for a deeper corrective pullback.

The gov't will look to pass a special law in parliament today (23 December) that will ensure the state can continue to levy taxes, borrow on financial markets, and pay public sector workers in the absence of a budget being passed for 2026. First, Minister of the Economy, Roland Lescure, and the Minister of Public Action and Accounts, Amélie de Montchalin, are in front of the Senate Finance Committee to answer their questions on the law. The National Assembly will then debate the bill from 1400CET (0800ET, 1300GMT), followed by a vote. It will then immediately move to the Senate in order to be passed before the midnight deadline set by the Constitution (23 Dec being 70 days after the first submission of the budget to parliament). Once passed by both chambers, President Emmanuel Macron can promulgate the law in the coming days before the new year. 

• Committee work in parliament on the draft state budget (PLF) could resume as soon as the week of 5 January, according to Minister Delegate for Relations with Parliament Laurent Panifous, after he said that negotiations between the gov't and political groups will continue over the Christmas period.
• Speaking on France 2, Panifous also confirmed the National Assembly would reintroduce the large company profit surtax that was removed from the Senate's version of the PLF. Panifous: "Following the Senate's work, we have a text with a deficit of 5.3%, which is far too high. The shared objective on both the left and the right is 5%,"

The dovish repricing in the EUR short end, after ECB Executive Board member Schnabel gave further details re: her comfort with the market pricing the next ECB move as a hike, leaves EGB spreads vs. Bunds little changed to ~1bp tighter.

• Peripheral paper benefits the most, with BTPs outperforming.
• 70bp remains the key level to watch in both BTP/Bund & OAT/Bund spreads.
• Moves back above the level in the former have been limited since the break below earlier this month, while we have previously suggested that the level may continue to provide support for the latter through year-end after the French parliament failed to agree on a Budget proposal.
• Seasonal upticks in supply are due in January. If syndications are met with firm demand, then expect the now customary frontloading of supply by debt offices.
• Our summary of 2026 funding plans can be found here.