/OATS: CDS Sticks To Recent Range, 10-Year OAT/Bund Spread Above April Closing Wides

Benchmark French CDS reaction to the EU election results and the subsequent calling of a French snap election generally encapsulates the broader prevailing view.

• Ultimately, markets seem to hold limited long-term worry surrounding the French political situation, albeit with short-term uncertainty heightened.
• 5-Year CDS widens by a little over 1bp to trade at ~25bp, shy of the March ’24 highs
• OATs have been more sensitive, with the 10-Year OAT/Bund spread showing above the early April '24 closing highs.
• Fiscal worry was already evident in France.
• A reminder that policymaker rhetoric and tabled actions seemed to prevent the worst-case sovereign rating scenario as France avoided negative action from Fitch & Moody’s, allowing OAT spreads to move off early April wides.
• Still, the country received a one-notch downgrade from S&P in late May (placing that rating on an equal footing with the Fitch equivalent).
• Different forms of Iberian/IRISH tighteners vs. OATs remain a favoured sell-side call.
• When it comes to the upcoming French election, our political risk team has already noted that “the most likely outcome is for RN to increase its seat total but fall short of an overall majority. RN President Jordan Bardella has said that he would serve as Macron's PM, and the prospect of RN becoming the largest party cannot be ruled out.”
• Markets are therefore contemplating the issue of 'Cohabitation' (PM and President from different parties), which is rare in France and would likely limit policymaking capabilities during a period of already heightened fiscal uncertainty.

Fig. 1: French 5-Year CDS Vs. 10-Year OAT/Bund Spread