Wider Vs. Bunds, Fitch Downgrade In Focus

OATs maintain their early widening bias vs. German equivalents across all major tenors, with catch up to Monday’s moves in U.S. Tsys and, more notably, Fitch’s decision to downgrade France to AA-; Outlook Stable from AA; Outlook Negative dictating price action.

• The degree of widening is most pronounced at the front end of the curve (~3bp at the 2-Year point), moderating as we move further out the term structure, sitting at ~0.5bp at the 30-Year point. The 10-Year spread to Bunds hovers around YtD wides, a couple of bp shy of the 60bp mark.
• In terms of reasoning behind the downgrade (click for full release), Fitch noted that “fiscal metrics are weaker than peers and Fitch expects general government debt/GDP to remain on a modest upward trend, reflecting relatively large fiscal deficits and only modest progress with fiscal consolidation.” Also, Fitch “believes that social and political pressures illustrated by the protests against the pension reform will complicate fiscal consolidation.”
• Earlier today, analysts at Commerzbank suggested that “while markets should not be bothered too much by the downgrade of France given the focus on the liquidity premium of OATs as well as the extremely stable issuance dynamics, catch-up by other rating agencies could be on the cards as well as mechanical follow-up downgrades for EFSF and French agencies.”