MFS: Political developments France bad news for French government bonds

MFS: Political developments France bad news for French government bonds

Fixed Income Politics France
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The results of the European Parliament elections and President Emmanuel Macron's surprising decision to dissolve parliament have added to the near-term political and economic uncertainty in France.

Based on the EU Parliamentary data as it stands, it is possible that Macron’s centrist pro-EU Renaissance party weakens its showing in the National Assembly. That said, the voting system is different to the EU elections and electors may behave and vote differently in a national poll compared with EU parliamentary elections at the polls.

It is entirely conceivable Le Pen’s National Rally might consolidate or increase its standing in the National Assembly. This would lead to a further political gridlock between the French Parliament and the French President, likely slowing the improvement in France’s fiscal composition and could hinder political predictability – likely seen as credit negative by the market.

We view this event risk as negative for OAT spreads and see valuations as justified in a 65bp-70bp spread range to Bunds. We are likely to see further underperformance vs Spain and the supras, at the very least justifying recent moves. We stress that much remains uncertain at this stage. It is unclear what the precise political calculus at EU level will be and the domestic political campaign in France is yet to begin.

What is clear though is that this is a surprise with few immediately obvious positive OAT market implications. France remains a highly rated credit with strong institutions and a pro EU head of state and the lack of anti-euro rhetoric amid the event risk is likely to contain spreads and their volatility overall.