Fiscal Slippage Concerns Noted, Sell-Side Remain Cautious On Spreads

Sell-side comments surrounding OAT spreads continue to point to caution owing to perceptions surrounding ongoing French political uncertainty and further fiscal slippage:

• Commerzbank: Risk of fiscal slippage is now even higher, as the large government blocks are unlikely to agree on structural reforms and may rather compromise on higher spending over the next few years. This suggests no lasting relief for OAT spreads.
• J.P.Morgan: Given our view of 10Y OAT/Bunds staying in the 60-70bp range, we maintain a neutral stance on OATs at current levels. This outcome also validates our assessment of French political developments, as an idiosyncratic story. We keep long 10-Year EU vs. swaps as our overweight.
• Rabobank: We are now likely looking at a period of policy paralysis. From a spread perspective, uncertainty argues that we remain at elevated levels (a tentative 60-70bp range in OAT/Bunds seems plausible). This outcome does not leave us expecting a structural shift higher in spreads.
• UBS: We would expect OAT/Bunds to trade ~70 bps but with upside risk the longer the formation of a new government takes. France continues to benefit from a large institutional investor base with a relatively low share of OAT holdings at banks, so we expect OAT auctions to proceed without any issues.