FRANCE: OAT/Bund Spread Widens; New PM Lecornu Likely To Face Similar Challenges
The 10-year OAT/Bund spread has widened 1bp to 82bps this morning, underperforming EGB peers. Markets are digesting President Macron’s appointment of former defence minister Sebastien Lecornu to the PM post. Initial reactions from opposition parties suggest Lecornu will face many of the same challenges as his predecessors in passing a budget. This keeps French political and fiscal risks heightened, limiting meaningful narrowing risks for OATs.
- Olivier Faure, Socialist party leader, has noted that “There is a lack of understanding because the French were hoping for change, and deep down, Sébastien Lecornu at Matignon is Emmanuel Macron at Matignon; they are the same people” (source) A reminder that former PM Bayrou managed to push his 2025 budget through the National Assembly only because he received tacit support from the Socialists. This tacit support ended following Bayrou’s 2026 budget proposals.
- Meanwhile, RN’s Le Pen has said that Lecornu will be judged “based on his record, his actions, his policy choices in giving France a budget, and this against our red lines" (source),
- The far left LFI party has said that it will issue a symbolic censure motion against Lecornu’s government, and has unsurprisingly said that it will “not participate in a grand coalition”
- A reminder that a Bloomberg benchmark 10-year OAT roll yesterday has skewed OAT/EGB spreads wider by ~7bps this week.
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MNI: ITALY JULY FINAL HICP 1.7% Y/Y
- MNI: ITALY JULY FINAL HICP 1.7% Y/Y
- ITALY JULY FINAL HICP -1.0% M/M
BONDS: Rally Extends
As noted in our gilt comment, a pullback from session highs in wider global equity index futures is helping underpin the early rally in bonds at this stage, although TY, Bund & gilt futures remain within the ranges in play over the past couple of sessions.
- Other supportive factors include:
- Some focus on the potential deflationary impact surrounding this week’s Trump-Putin meeting in Alaska. However, Ukrainian President Zelenskiy has pushed back against the idea of land concessions in any peace deal with Russia, seemingly leaving the two sides very much at odds when it comes to pre-requisites surrounding any ceasefire agreement.
- A favourable cash flow backdrop for EGBs on the week (issuance pares back, while notable redemptions and coupon payments are noted, see earlier bullets and our weekly EGB issuance document for greater details).
- Another particularly soft UK KPMG-REC report on jobs ahead of tomorrow’s official labour market report from the ONS.
- Core global bond curves bull flatten, EGB spreads to Bunds little changed.
GILTS: Bull Flattening As Bonds Rally & REC Jobs Report Remains Soft
Gilts rally alongside global peers, with equity indices away from highs and some focus on the potential deflationary impact surrounding this week’s Trump-Putin meeting in Alaska.
- A reminder that Ukrainian President Zelenskiy has pushed back against the idea of land concessions in any peace deal with Russia, seemingly leaving the two sides very much at odds when it comes to pre-requisites surrounding any ceasefire agreement.
- Gilts also benefit from the latest KPMG-REC report on jobs, which pointed to an ongoing slowing of the UK labour market, with wage growth seemingly restrained as businesses react to tax hikes.
- Futures rally to 92.37. Initial resistance of note located at the August 5 high (92.84). Bulls look to regain momentum after a close below the 20-day EMA/
- Yields 4-5bp lower, curve biased a little flatter.
- 2s and 10s move back into the lower half of the ranges witnessed since early June, 2s last 3.86%, 10s last 4.55%.
- 2s10s and 5s30s continue to trade around 70bp & 140bp, respectively.
- Dovish extension in GBP STIRs given the rally in the long end. SONIA futures showing flat to +4.0, BoE-dated OIS pricing 18bp of easing through year-end and 28bp through February (vs. 17bp & 27bp ahead of the gilt open).
- Little of note on the UK calendar today, with tomorrow’s labour market report headlining the weekly schedule (expect our full preview of that release later today).
