“Republican Front” Tactics Promote Further Tightening Vs. Bunds

Further OAT/Bund tightening early today, with the spread last trading at ~67bp. Note that a 10-Year Bund benchmark roll is impacting the level of the spread (grey market pricing of the soon to be issued Aug-34 Bund is acting as the BBG benchmark), but OATs still outperform on the day.

• A Le Monde tally shows 221 candidates dropping out of the second round of the French legislative election, as the leftist alliance and Macron’s Ensemble try to limit right-wing RN gains via a “republican front.”
• While this agreement lowers the chances of an RN majority, inherent uncertainty provided by a hung parliament will likely prevent meaningful OAT spread tightening towards early June levels.
• This is also true when it comes to OAT spreads vs. PGBs & Irish bonds, as Portugal and Ireland operate on a stronger fiscal footing than France, providing RV tailwinds to their respective sovereign bonds.
• Several desks have pointed to the ~75-85bp area as a rough fair value level for OAT/Bunds in the medium-term, with opinion polls and comments from the major political parties providing the obvious sources of short-term headline risk.
• Elsewhere, tomorrow’s long end OAT supply will be closely watched.