Little Reprieve For OATs Vs. Iberian Paper, Even As OATs/Bunds Narrows A Little

10-Year OAT/Bunds edges away from last week’s multi-year closing wides as weekend risk premium comes out of French paper. However, there hasn’t been much respite for OATs on an equally weighted fly vs. 10-Year SPGBs & PGBs.

• Iberian fiscal & sovereign credit rating trajectories keep that fly at levels not seen since pre-GFC times, with little reason to fade the move at this juncture.
• There wasn’t any meaningful movement in the French political situation over the weekend, with RN cementing their opinion poll advantage ahead of the first round of voting in the French lower house elections (Sunday 30 June).
• Macron’s party trails both RN & the leftist bloc in the opinion polls, increasing the risk of political & fiscal paralysis, with French fiscal angst already heightened.
• Le Pen has suggested that Macron may need to resign if political paralysis becomes apparent, Macron has played this idea down on several occasions.
• Some pollsters have suggested that RN may achieve an absolute majority in the lower house, although the two-stage polling system complicates projections.
• Potential lower house governing agreements between the left & right have also been touted in the case that a party/group fails to win an absolute majority. This seems quite unlikely to us at this stage, with that idea limited to some political watchers as opposed to the mainstream/parties.
• Any such governing alliance would likely trigger further OAT spread widening, given the uncertainty related to the stark opposing views of the parties when it comes to key policy pillars.

Fig. 1: 10-Year SPGB/OAT/PGB Butterfly (bp)

Source: MNI - Market News/Bloomberg

Fig. 2: POLITICO Poll Of Polls - France

Source: POLITICO