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Goldman & Mizuho Not Interested In OAT Tighteners At Prevailing Levels

OAT
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A couple of sell-side names warn against engaging OAT spread tighteners at current levels to Bunds given the French political backdrop, echoing other commentary we have seen in recent days:

  • Goldman: Across the range of plausible outcomes, the risks for bond spreads often stem more from policy deadlock than from active policy decisions, although we do think markets need to account for increased fiscal risk. We think it is likely that the widening in OAT-Bund spreads will remain contained to less than 20bp compared with last Friday's levels. That said, even accounting for the recent widening, we do not find OATs attractive, especially relative to Bonos.
  • Mizuho: We expect either RN to win and secure a majority or a very divided non-RN government. We think that both are negative for French debt sustainability. Brace for more widening in OAT-Bund spreads in the near term. ’17 wides (75bp) will likely be tested as we approach the two voting rounds, especially if new polls confirm the far-right’s popularity. Even if Le Pen & Co. abstain from pushing “adiEU”, the differential in the debt-to-GDP ratio between Germany and France has risen enough to justify the widening. The credit rating vs Germany has also deteriorated in the last 5 years.
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A couple of sell-side names warn against engaging OAT spread tighteners at current levels to Bunds given the French political backdrop, echoing other commentary we have seen in recent days:

  • Goldman: Across the range of plausible outcomes, the risks for bond spreads often stem more from policy deadlock than from active policy decisions, although we do think markets need to account for increased fiscal risk. We think it is likely that the widening in OAT-Bund spreads will remain contained to less than 20bp compared with last Friday's levels. That said, even accounting for the recent widening, we do not find OATs attractive, especially relative to Bonos.
  • Mizuho: We expect either RN to win and secure a majority or a very divided non-RN government. We think that both are negative for French debt sustainability. Brace for more widening in OAT-Bund spreads in the near term. ’17 wides (75bp) will likely be tested as we approach the two voting rounds, especially if new polls confirm the far-right’s popularity. Even if Le Pen & Co. abstain from pushing “adiEU”, the differential in the debt-to-GDP ratio between Germany and France has risen enough to justify the widening. The credit rating vs Germany has also deteriorated in the last 5 years.