LIVE MARKETS-French IG credit shrugs off OAT drama, financials take hit

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FRENCH IG CREDIT SHRUGS OFF OAT DRAMA, FINANCIALS TAKE HIT

France is in investors' crosshairs at the moment, with the Bund-OAT spread up at 145 basis points on Friday, but Goldman have a note out on Friday arguing that the spillover to credit is fairly contained for now.

They say that 27% of French non-financial IG bonds are now trading inside similar maturity OATs (French government bonds), i.e. have a lower yield.

That's the most since 2011.

This "suggests the market is differentiating between sovereign and corporate risk, rather than treating the two as identical," say Goldman.

Where they are seeing some more stress is in financials, and they flag that French-domiciled banks now trade wider than peers, in contrast to Spanish and German-domiciled banks, which continue to trade significantly tighter than their respective peer groups.

Goldman say financials tend to be the first segment of credit markets where sovereign concerns become visible, given their larger domestic exposures, stronger links to the local economy, and greater sensitivity to funding conditions.

"We see further scope for French financials to continue to underperform peers ahead of next year’s presidential election and recommend an underweight," they argue.

"Still, we think the hurdle is high for French senior bank spreads to reach the levels seen among Italian and Spanish banks during the 2011-2012 sovereign crisis. The key difference is the market’s awareness of the ECB’s perceived backstop, including tools designed to counter unwarranted and disorderly market dynamics that threaten monetary policy transmission."

(Alun John)

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