French Political Uncertainty & BoJ Dominate Early On Friday

French political uncertainty continues to dominate in Europe (polling woes for Macron and an election pact in the left wing of the political spectrum steal the headlines there), with the 10-Year OAT/Bund spread registering fresh multi-year highs of ~76bp, before fading back below 75bp.

• The ~78bp level marks the next area of meaningful interest. That represents the ’17 closing high in the spread and coincides with the time that ‘Frexit’ worry peaked, along with Le Pen/RB popularity in the polls, running into the ’17 election.
• A ‘dovish’ outcome from the BoJ would have provided a secondary bullish input for EGBs this morning, but recent comments from Governor Ueda, suggesting that the proposed cuts to JGB purchases will be “substantial,” have countered some of the JGB bid/JPY weakness. He also pointed to the potential for a July rate hike, but stressed data dependence.
• This, along with some stabilisation in OAT spreads, helped core global FI markets away from best levels.
• Bund futures have moved through 2 resistance levels already today, trading as high as 132.48 before backing off to 132.15. 132.48 provides the 2.4% 10-Year yield equivalent level in the contract today, with the May yield low located just below at 2.399%. Beyond there, bulls would eye the May 16 high/bull trigger (132.83).
• German ASWs rally again, building on this week’s bounce from multi-year tights.
• German yields are 3-4bp lower as the curve bull steepens. 2s10s move back towards multi-month steeps.
• Spread-wise, BTPs lead the widening, adding ~5bp to spreads over Bunds, struggling during broader bouts of risk-off flow.
• Dutch paper is a relative outperformer, only widening by ~1bp vs. Bunds.