OAT: 10-year OAT/Bund Spread Back Near 80bps Following Moody’s Downgrade

The 10-year OAT/Bund is 1bp wider today at 79bps, off earlier highs of ~80.5bps, as markets digest Moody’s off-cycle ratings downgrade late Friday and this morning’s December flash PMI data. Moody’s had placed France on a negative outlook in October, but opted to downgrade its rating to Aa3 (Outlook Stable) as “political fragmentation is more likely to impede meaningful fiscal consolidation”.

• Moody’s also warned of the “risk of a durable increase in financing costs which would further weaken debt affordability”.
• This morning, new French PM Bayrou is meeting far-right Rassemblement National (RN) leader Le Pen in efforts to start forming his government.
• Our Political Risk team wrote on Friday that the conflicting demands of Les Republicains (LR), leftists such as the Socialist Party (PS), and the RN will make passing a budget as difficult a prospect for Bayrou as it was for Barnier. This is likely to limit meaningful narrowing in the OAT/Bund spread into year-end.
• While the EU have thus far refrained from any public warning on potential fiscal slippage in France, the MNI Policy Team highlighted on Dec 4 that officials are closely watching for major deviations from plans to limit future public spending growth to an average 1.1%.
• Meanwhile, Reuters sources suggested on Dec 11 that France is for now keeping its 2025 borrowing plans (E300bln of issuance) steady, “but could adjust them once a new budget bill is ready next year”.