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.
The recent sharp widening of the OAT/Bund spread to 150 basis points was likely overdone, with French bonds retracing from oversold levels as global fixed income selling eases, according to Halpenny. The consolidation plan proposed by Marine Le Pen appears unrealistic and unlikely to materially impact OAT risks before the upcoming election.
The broad sell-off in global fixed income assets has created room for OATs to stabilize and retreat from oversold territory. Foreign investors hold 56% of French sovereign bonds, making global fixed income sentiment a critical factor in determining OAT/Bund spread movements in the future. With a plausible scenario of a presidential election runoff between Le Pen and Jean-Luc Melechon, who is currently polling second with around 20%, the political uncertainty remains a significant risk for OATs. Overall, EUR/USD downside risks are expected to prevail.
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