Societe Generale Look Into OAT Plays After Fitch Downgrade

In lieu of Fitch’s rating action on France back Friday (a one notch downgrade to AA-; Outlook Stable), Societe Generale note that “the impact of the downgrade on the OAT/Bund spread has so far been moderate. This is likely because the market has already been pricing in a relatively high premium for OAT risk. Rather than shorting OATs vs Bunds, we see better value in selling OAT 10-Year vs swaps or in OAT 2-/10-Year steepeners vs Bunds.”

• “French agencies’ ratings will likely be changed by Fitch in the coming days, as they are tied to the rating of the French state. This could push z-spreads wider, but the move should be contained. French agencies remain cheap vs OATs, and any small underperformance will make them even more attractive.”