Long End Supply Presents Next Litmus Test, Smooth Passage Expected

Today’s long end supply presents the next litmus test for OATs.

• The offering represents the smallest amount of long dated-supply seen YtD (EUR8.0-10.5bn), seeing a similar reduction in size to the mid-June MT OAT auction.
• The reduction in size in the recent rounds of OAT issuance is of course reflective of the political uncertainty evident in France at present. However, it is worth recalling the mid-June MT supply passed fairly smoothly, despite some worry ahead of the sale.
• OAT spreads have moved off their widest levels in the run up to the auction, with the odds of an RN absolute majority fading, owing to the ‘Republican Front’ election agreement between the leftist alliance and Macron’s Ensemble.
• This, coupled with the relatively smooth passage of the most recent round of MT OAT supply, has reduced worry ahead of today’s offering.
• Swap spreads are also off extremes but still comfortably tighter vs. pre-election announcement levels.