Euro: OAT repricing keeps downside bias against US Dollar – MUFG

Halpenny argues that last week’s sharp widening of the OAT/Bund spread to 150 bps looked overdone, with French bonds now retracing from oversold levels as global fixed income selling eases. He sees Marine Le Pen’s aggressive consolidation plan as unlikely to materially change OAT risk ahead of next year’s election. MUFG expects EUR/USD downside risks to prevail.

French OATs, politics and Euro outlook

"The selling of OATs last week and the OAT/Bund spread widening out to 150bps certainly looked like a move that was overdone and with the broader global fixed income sell-off easing, there has been some scope for the OAT market to stabilise as well and that has now turned into a retracement from oversold levels."

"The Le Pen proposals look unrealistically aggressive and will likely be questioned by investors who will doubt the capacity for such a sharp fiscal consolidation over such a short period."

"But with 56% of French sovereign bonds held by foreign investors, global fixed income sentiment will remain a key driver of the OAT/Bund spread over the period ahead."

"This alternative budget is unlikely to make much difference to the risks associated with OATs ahead of the election next year – especially given a plausible scenario of a presidential election run-off in the second round between Le Pen and the hard-left candidate Jean-Luc Melechon, who is now usually polling second on around 20% versus Le Pen on around 30%."

"EUR/USD downside risks are set to prevail."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)