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

OAT
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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.”
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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.”