Citi: OAT Widening Not A Fade, Yet

When it comes to the French political process, Citi note that “this will be the first legislative election since 1997 that doesn’t follow a presidential election and risks handing over the control of domestic policy to the far-right RN.”

• “This risk was highlighted by the first opinion poll conducted since the election announcement, published after yesterday’s close.”
• “It suggested 235-265 seats for RN (short of the 289 for majority), compared to just 125-155 for Macron’s Ensemble, 115-145 for the left-wing NUPES, and 40-55 for the centre-right LR.”
• “The far-right seat share may be further enhanced if the two far-right parties, in negotiation at the time of writing, join forces.”
• “To estimate fiscal implications of this scenario, we note that RN’s pledges into the 2022 presidential election implied annual government spending of 1-3% of GDP in excess of Macron’s and, if implemented now, would further steepen the debt/GDP trajectory for coming years.”
• “Overall, the OAT widening might have further to go and doesn’t seem obvious fade to us until 10yr OAT-Bund spread reaches 65bp. Trade-wise, we maintain our short in 20yr OATs vs PGBs.”