📝Rising Political Risks to Pressure Domestic Spreads: Commerzbank Strategy

The present situation looks more akin to 2017, when the sudden

emergence of risks of a Le Pen election victory triggered

sustained widening pressure in OATs on rising political risk

premiums, as captured by the explosion of our model residual

for 10y OAT-Bund spreads (see following chart) - which only

reversed upon Macron's victory.

For sure, Frexit fears are unlikely to reemerge, thus implying

much less scope for spread widening vs. Bunds.

At the same time, OATs hardly trade with a discount vs. our fair

value model reflecting modest funding and credit components

(see following chart). Rating agencies will also take note. - Commerzbank Rates Strategy