Medium-Term Fiscal Headwinds Pressure OATs, Ratings Updates Will Be Key

OATs have widened vs. most EGBs over the last week, with French fiscal worry at the fore in light of the ’23 deficit figures/government commentary and subsequent comments from rating agency Moody’s re: the French fiscal outlook.

• Medium-term fiscal pressure has clearly increased.
• The fiscal headwinds resulted in French PM Attal pointing to deeper cuts to unemployment welfare schemes late on Wednesday.
• Finance Minister Le Maire had already tabled the idea of further spending cuts.
• We have flagged the upcoming French sovereign credit rating round (across April & May) as the next focal point for OATs.
• S&P already has France on a ‘negative’ outlook (rating AA), with risks of a one notch downgrade seemingly elevated.
• We also highlighted the risk of a negative outlook move at Fitch (current rating: AA-; Outlook Stable), while this isn’t a consensus view, the odds of such a move are non-negligible.
• We believe a negative outlook move at Fitch would have more of an impact on OATs than a one-notch downgrade at S&P, with France already rated one notch lower by Fitch.
• Citi suggest that France’s “fiscal woes might speed up OATs’ convergence with Bonos,” which has been a preferred medium-term view of theirs.
• Their preferred trading expression is a 15s30s Bono flattener vs OATs (entered in late January), given “the relationship of long-end credit risk premium with debt/GDP ratios.”