Outperforming On Ratings Relief

Ratings relief for OATs this morning, after France avoided negative action from both Fitch (current rating: AA-; Outlook Stable) & Moody’s (current rating: Aa2; Outlook Stable) after hours on Friday.

• That allows OATs to outperform most EGB and core global FI peers across the curve, as the residual pricing surrounding moves to negative outlooks is unwound.
• 10-Year OATs have pared a little more than half of the late March widening vs. Bunds.
• A reminder that we suggested that markets were likely pricing some risk of negative outlook moves, particularly from Moody’s given they rate France one notch above the Fitch equivalent.
• Rating agency comments surrounding France were not particularly upbeat, but the country’s recent fiscal deterioration was well-known.
• Most had expected a one notch downgrade from S&P at the scheduled update at the end of May (current rating AA; Outlook Negative).
• However, Citi suggest that the Friday’s inaction “might increase the market’s confidence in the likelihood that S&P keeps France’s rating unchanged on 31 May. This further increases our conviction in OAT longs we recommended on Thursday.” Their favoured play came via the 10yr Bund-OAT-Bono fly(-0.55: +1.00: -0.45 weights)
• Commerzbank are a little more guarded, noting that “the relief should be limited as fiscal risks linger on.”

Source: MNI - Market News.Bloomberg