EGBS
The run up to the second round of the French election saw the 10-Year SPGB/OAT/PGB butterfly stabilise above 0, as odds of an absolute RN majority faded. We don’t expect meaningful range breaks in the short-term, as markets assess the new political backdrop.
- A further deterioration in fiscal risk would be a prerequisite for the fly to trade consistently below 0, in our view.
- While the worst-case election scenarios for markets (an absolute majority for RN or NFP) have been avoided, the likely prolonged period of French political uncertainty is capping rebounds in the structure after it hit the lowest level seen since the GFC.
- S&P have warned that the country’s credit rating would come under pressure if economic growth was materially below their projections for a protracted period. The rating agency also warned that a failure to reduce France’s budget deficits or the interest/revenue ratio pose further downside risks.
- Elsewhere, the leftist alliance’s strong showing in the election presents downside spending-related risks for OATs, although Melenchon’s push for full enactment of the alliance’s pre-campaign pledges will likely be watered down over time.
Fig. 1: 10-Year SPGB/OAT/PGB Butterfly (bp)
Source: MNI - Market News/Bloomberg
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