/OATS/RATINGS: OAT Spreads Resilient Despite Negative Action From S&P

OATs trade in pretty resilient manner after S&P provided a one-notch downgrade for France after hours on Friday (AA-; Outlook Stable), bringing the agency’s rating of France in line with that of Fitch.

• The 10-Year OAT/Bund spread is little changed on the day, a touch above the middle of the range that has prevailed in the time since the onset of the initial fiscal-inspired widening in late March through early April.
• Markets seem relatively at ease with the move from S&P, with the French fiscal headwinds well-documented and the government already enacting some steps to trim spending in recent weeks.
• A reminder that many had flagged the potential for such a move in recent weeks, even as France avoided negative action at both Fitch & Moody's.
• This overall ratings snapshot, coupled with the French action earmarked/enacted to date, leaves the spread comfortably off early April wides.
• Since Friday’s ratings move French PM Attal has said that the country will "continue to reform" and will "of course" meet its deficit goals.
• Finance Minister Le Maire also underscored the need to further curtail spending, although once again ruled out tax hikes.
• The ratings action seems to be more politically damaging than market negative (for now), an idea we flagged ahead of the announcement.
• Furthermore, S&P warned that “political fragmentation will likely make the continued implementation of policies to address economic and budgetary imbalances somewhat uncertain.”
• Fiscal matters are set to provide the most meaningful inputs into OAT RV performance over the coming months, with many enacting/recommending peripheral/OAT spread tighteners against the backdrop of seemingly impending ECB easing and some cases of preferential peripheral fiscal dynamics vs. France.
• Selected sell-side commentary on the matter can be found below:
• Citi: For OATs, the key risk comes from the current valuation, which thanks to the recent real money buying has reversed the cheapening vs other EGBs seen post deficit headlines. While this downgrade is unlikely to be a surprise, markets might be tempted to price in more risk premium ahead. This is consistent with our medium-term view of OATs converging with PGBs and Bonos.
• UniCredit: Strong liquidity and the fact that a significant share of investors are little sensitive to changes to France’s rating are supportive of OATs.

Source: MNI - Market News/Bloomberg