MFS: Uncertainty surrounding French government bonds persists
'To say that event risk for France and OATs is high in the coming days is something of an understatement. The vote on the 8th September appears to be a done deal in that Bayrou’s government will fall. What ensues will be key to dictating the tone of OAT spreads.
Our base case is for Macron to try another centrist PM and at some point a technocratic PM can’t be ruled, and neither can fresh elections – ultimately. We then have a general strike on the 10th September where the degree of social unrest is yet to be seen and then downgrade risk is real on Friday when Fitch reports on France’s rating (which carries a negative outlook).
All the while, it would appear the degree of fiscal consolidation looks set to be less and slower than Bayrou’s framework. This keeps pressure on the sovereign’s credit fundamentals. It is therefore hard to be constructive on the spread even after the recent move to around 80bp. We expect ongoing spread volatility with risks leaning to a leak wider, not tighter, in the spread to Bunds.'
