ASW Widening Noted On French Political Uncertainty

The political uncertainty in France has triggered German ASW spread widening this week, with the major measures on track to register a fourth consecutive day of gains.

• This comes after a pronounced and elongated run of tightening, as repo specialness and bond scarcity worry effectively vanished from markets.
• The pronounced tightening move took the major spread measures through various multi-year/psychological extremes, with many strategists recommending their clients maintain tightener positions.
• This positioning, coupled with German bond demand in light of the French political unease, has allowed ASW spreads to stage a fairly aggressive bounce from cycle tights.
• There have been some breaks in the widening pressure.
• The stabilisation of OAT spreads and President Macron’s insistence that he is not considering his future, irrespective of the upcoming snap election outcome, provided some limits for the widening.
• Still, political uncertainty for the second largest European economy, coupled with the related potential for another ratcheting up of French fiscal concerns, keeps German ASWs underpinned as relative demand for Bunds returns.
• That allows some of the major ASW metrics to push through Tuesday’s wides today.