2017 French Presidential Election

Friday 12 May 2017

OAT/Bund Spread : Recent Trends, Equilibrium Value and Perspectives

Interest rate differentials between France and Germany rose sharply in the months leading up to the French presidential elections and even reached levels never seen since 2011. But after the election of Emmanuel Macron (and even a little before, to tell the truth), these spreads have narrowed markedly, proof of the fall of the specific risk on France.

Although political factors have recently guided the spreads, others will influence sovereign spreads in the euro area over the coming quarters: debates over negative interest rates, robustness of GDP growth, timetable for the end of the ECB's Quantitative Easing (and therefore its public asset purchasing programme, the PSPP) are all decisive factors.

To better understand the underlying situation, it is necessary to take a step back and analyse the movements of spreads over the last two decades, but also to draw lessons from academic research on the subject, in order to estimate equilibrium values.
This note (the 10th in our series) has the ambition to present the factors that will change sovereign spreads in the coming quarters.