Schroedinger's OAT

The stalemate on the OAT market following the election reflects a standstill before Macron engages in the process of selecting a PM. And tells us what to expect of the next budget.

The 2024 snap legislative election ushered in a new political era in France, as many politicians and commentators rightfully pointed out. The balance of powers has shifted dramatically. Macron's seven-year dominance is over at last.

However, it's still difficult to know who really won. The "Front républicain" has twisted many local results, since leftists have voted for Macron's incumbents, and pro-market citizens sometimes chose to support a communist candidate to avoid Le Pen's National Rally. Nouveau Front Populaire (NFP), the left-wing coalition, claims victory. But at the same time, Le Pen's party is leading when it comes to the number of seats per faction. And Macron’s allies+conservatives are also strong. So who knows how Macron will manoeuvre out of his weakened position?

In our previous article, we illustrate the possibilities that he still has to hold onto some power. For the moment, he has slowed the tempo, accepting resignation from his government, but keeping it in power to deal with current affairs. And probably to be featured on the Olympics' pics. The recent reelection of his own party's Yaël Braun-Pivet as President of the French National Assembly showed that, ultimately, conservatives LR are ready to team up with Macron's party to counter the Left and the nationalists. But at what price for the French President ?

While political turmoil might kick start at any moment, no matter the combination of the government, it is no surprise that the OATs' risk remained stable compared to the German Bund, their benchmark. As long as we don't know what's going to happen to the 2025 budget, and the tone that France will take to talk to EU executives, nothing will move on the market. However, Macron’s party lost any control on financial positions in the National Assembly this weekend, which promises fierce battles around public finances.

Meanwhile, hawkish institutions are stepping in. The ECB, and Cour des Comptes, the supreme financial auditor of public accounts, highly regarded in the public debate here, have both warned that the stability programme presented in April by Bruno Le Maire, who still remains the Economy and finance Minister, is not good enough. If the latter regularly plays politics, the former is more used to tread lightly. But now we know that the European institutions are probably ready to fight back any attempt by NFP to twist EU financial rules. This is also a message to Macron to not mess up in choosing the next PM, and to the market that financial stability is a top priority.

Despite the lack of volatility on OATs', inversion of the curve shows that investors still have some concerns in short term.OAT's yield is still higher for every maturity below one year, than anything beyond 20 years. So, if you have faith in France's ability to make it through the summer, go for it. When the PM will be nominated, will your portfolio be dead, or alive ?