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French Political Risks Could See 10s30s BTPs Flatten Vs. OATs

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The 10-/30-Year BTP/OAT box sits just below its July closing high, and ~2bp below its ’24 closing high.

  • A period of prolonged French political and fiscal risks could weigh on the structure.
  • Relative Italian political stability would be a factor in that instance, even as the country faces some of its own fiscal issues.
  • Italian 10s30s may be turning, with the recent run of steepening stalling at multi-month highs around the 60bp mark.
  • Meanwhile, the French curve will become more susceptible to steepening pressure the longer the French political and potential fiscal impasse rolls on.
  • March’s price action shows how quickly the tide can turn, although we note that BTP beta to wider EGB fiscal worries could provide some limitations to the downside.
  • Here, we point to the French situation being viewed as idiosyncratic, as opposed to a systemic threat to the Eurozone, which should allow BTPs to outperform if French fiscal worry becomes more pronounced.

Fig. 1: 10-/30-Year BTP/OAT Box (bp)

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The 10-/30-Year BTP/OAT box sits just below its July closing high, and ~2bp below its ’24 closing high.

  • A period of prolonged French political and fiscal risks could weigh on the structure.
  • Relative Italian political stability would be a factor in that instance, even as the country faces some of its own fiscal issues.
  • Italian 10s30s may be turning, with the recent run of steepening stalling at multi-month highs around the 60bp mark.
  • Meanwhile, the French curve will become more susceptible to steepening pressure the longer the French political and potential fiscal impasse rolls on.
  • March’s price action shows how quickly the tide can turn, although we note that BTP beta to wider EGB fiscal worries could provide some limitations to the downside.
  • Here, we point to the French situation being viewed as idiosyncratic, as opposed to a systemic threat to the Eurozone, which should allow BTPs to outperform if French fiscal worry becomes more pronounced.

Fig. 1: 10-/30-Year BTP/OAT Box (bp)

Keep reading...Show less