Bund yield gap over 100 bps if government collapses
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OAT-BUND YIELD GAP OVER 100 BPS IF GOVERNMENT COLLAPSES
French government bonds held steady on Thursday, but analysts still worry about a further increase in the risk premium on French debt.
Barclays says that a government collapse would fuel political turbulence against a backdrop of weak fiscal fundamentals, "likely pushing OAT-Bund above 100 bps and driving OAT yields much closer to BTPs."
The Italian BTP spread versus Bund is currently at 122 bps. DE10IT10=RR
The future for French Prime Minister Michel Barnier's government looks bleak and if he stays in charge, he will do so by caving into demands to soften spending cuts, weakening the country's fragile public finances.
Citi set a target for the French spread at 100 bps more than a month ago and now says the 10-year OAT-Bund spread could rise towards its target of 100 bps sooner than its expectation of the third quarter of 2025.
"Even the survival of the coalition, for now, does not argue for a significant retightening of spreads in our view," says ING senior European rate strategist Michiel Tukker, adding he doesn't think Marine Le Pen will follow up on her threats to topple the government in the near term.
"We would stay away from OAT risk for now," says Hauke Siemssen, rate strategist at Commerzbank.
(Stefano Rebaudo)
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