Little Sign Of Reprieve For OATs Vs. Iberian Paper

Little sign of reprieve for 10-Year OATs on an equal weighted butterfly vs. Spanish & Portuguese peers.

• The fiscal and sovereign credit rating trajectories for the Iberian nations resulted in numerous sell-side cross-market SPGB & PGB tightener recommendations in recent times.
• Early ’24 French fiscal worry resulted in a particular focus on compression trades vs. OATs, even as France avoided negative rating action from Fitch & Moody’s.
• The French political uncertainty then added further momentum to that trade, pushing the Spain/France/Portugal 10-Year butterfly towards 0bp.
• The fly trades at levels not seen since pre-GFC times.
• Portuguese 10s have traded through 10-Year OATs since the early part of last week.
• Short-term fiscal trajectories and the potential for French political/fiscal paralysis mean that participants are unwilling to fade OAT weakness via Iberian peers at this juncture.
• Note that a benchmark roll for French 10-Year OATs has factored into the recent move, but that doesn’t alter the short-term picture for the structure.
• Similarly, a Portuguese benchmark roll in early ’24 impacted the below chart/pricing of the fly structure.

Fig. 1: Spain/France/Portugal 10-Year Butterfly (bp)