A month ago, we mused in France’s Fiscal Reckoning why the launch of implausible fixes by Presidential hopefuls would only further add to the risk premium being embedded in French rates both at a relative and absolute level.
The first of three trade ideas presented was going long the 10yr OAT-Bund spread, because “regardless of how you dice it up, the cleanest way to express the view is the simplest.”
This was called with the spread at 86.2bps. This morning it traded through 150bps, the largest yield gap between France and Germany since the euro-zone crisis.
We removed our exposure earlier this week, but we still hold our long outright 2yr Bund trade from The ECB Is Overtightening, as traders are indeed paring back the potential for ECB rate hikes into 2027 as we expected.
While it’s worth letting this run out, we outline why it’s time to start banking some profits from the French headaches.