Rates Spark: Time not on France’s side
The desk is taking a cautious stance regarding the outlook on French government bond spreads relative to German Bunds, influenced by deteriorating fiscal conditions in France. The commentary from ing-think predicts a widening spread between 10-year OATs and Bunds, potentially ranging from 100 to 125 basis points, driven by upcoming presidential elections and ongoing political challenges. Current consensus targets for the EUR/USD suggest moderate appreciation, positioning traders to watch for pertinent market movements. Per the full note, external factors, such as the lack of positive developments in the Middle East and political stability, add uncertainty to the EUR outlook.
What the desk is arguing
The desk argues that French government bond spreads are likely to widen due to France's challenging fiscal position and looming political uncertainties. Per the full note, the OAT-Bund spread has tightened briefly below 100 basis points, but the outlook remains bearish as significant hurdles persist regarding France's deficit reduction efforts and political dynamics leading to the presidential elections.
The risk sentiment surrounding lower oil prices has provided temporary support to rates, but the broader context suggests that the lack of substantive reforms and political cohesion will weigh on investor confidence. Specifically, recent efforts by the French government to reduce its deficit by €54 billion are expected to face strong opposition, highlighting the fragility of fiscal policies in the country.
Where it sits in our coverage
Our current consensus for EUR/USD rests at 1.1684, with a range between 1.1200 and 1.2000. Notable targets by firms include: - socgen: 1.1700 (Mar26) - morganstanley: 1.2000 (Mar26) - rbc: 1.1600 (Mar26)
The desk's forecast aligns with the upper end of the consensus target, especially against the backdrop of tightening spreads, where expectations for currency appreciation may converge with rising bond yield differences.
How other firms see it
Aligned firms generally share a bullish outlook on EUR appreciation, particularly as political clarification unfolds in Europe. Notably, commerzbank forecasts 1.3500 for GBP/USD, while hsbc anticipates a target of 1.1700 for the EUR/USD.
Conversely, danskebank holds a more conservative view with a target of 1.1200 for EUR/USD. Market participants should closely monitor EUR/USD movements as they closely intersect with shifts in fiscal policies and central bank liquidity measures which continue to evolve amidst geopolitical tensions.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Watch for OAT-Bund spread dynamics amidst political uncertainty in France.
- 02Current spread between OATs and Bunds could range from 100 to 125 bps.
- 03Consensus targets for EUR/USD indicate a modest bullish outlook.
- 04Monitor external geopolitical developments that could impact fiscal sentiment.
Market implications
Monitor the EUR/USD pair closely as it is poised to react to moves in government bond spreads. A break above 1.1700 could signal bullish momentum, while resistance may form around 1.1200 if spreads widen further. Traders should also keep watch on developments concerning French political stability.
Risks to this view
The primary risks to this outlook include any unexpected political stability or positive fiscal reforms in France that could lead to a significant tightening of bond spreads. Additionally, unexpected geopolitical resolutions in the Middle East could shift market dynamics dramatically, leading to a reevaluation of spread expectations.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
BNP Paribas | Bearish | 1.1500 |
UBS | Bullish | 1.1800 |
UOB | Bullish | 1.1800 |
Articles Rates Spark: Time not on France’s side Published 16:51 Rates Spark Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download The spread between 10Y French government bonds (OATs) and German Bunds has tightened below 100bp again, but we see more upside risks than downside risks going forward Benjamin Schroeder and Michiel Tukker Given France's precarious fiscal position, we think spreads between 10y German and French government bonds will continue to widen Tough to see French spreads tighten in the near term EUR rates started the week better supported, which was mostly owing to oil prices sinking towards US$100/bbl and taking front to intermediate rates lower alongside. Risk sentiment also improved on the back of these developments. Within the European government bond space, this has helped pull back the 10y OAT/Bund spread to below 100bp – albeit only briefly.
At the end of last week, we had seen the spread-widening dynamic accelerate on the back of the French government’s planned €54bn efforts to bring the deficit back to 5%. It is an effort that will likely face strong political headwinds. But even beyond that, we argue that time is not in favour of French bond spreads.
After this year’s budget, the focus will turn to the presidential elections. Those are likely followed by legislative elections and another potentially difficult government formation process. The European backdrop is also less favourable.
Coming out of Covid came with the sense of the crisis having instilled a greater sense of solidarity in the Union. Parsing the results of the German state elections but also looking at the strong polling of Le Pen in France, one now senses sentiment starting to turn again. Without any positive developments in the Middle East and/or more encouraging headlines in the political arena, we think the 10y OAT spread could occupy a range of 100 to 125bp in coming months.
And nervous eyes will increasingly turn to the European Central Bank for a solution. The hurdle for the ECB to engage in bond purchases might be higher in the current situation where the central bank is focused on inflation and eyeing further monetary policy tightening. Tuesday's events and market views Watch for some geopolitical headlines from the sidelines of the UN General Assembly this week, where President Trump is scheduled to meet Gulf leaders on Tuesday.
There won’t be much in terms of data out of the eurozone, with preliminary consumer sentiment for September the only highlight. Consensus sees a slight worsening as the conflict in the Middle East has escalated again. Weak consumption growth remains a drag on the eurozone economy and is unlikely to turn more positive in this environment.
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