The recent violent move in the OAT-Bund spread has caught the attention of market analysts, who are now reassessing their outlook for the French economy. According to TS Lombard, the spread has retreated towards 140bp, but the path forward is far from straightforward. The investment bank notes that around 150bp, markets will start to consider a policy response from the French government, which could make large outright OAT shorts much more dangerous.

However, TS Lombard cautions that without a credible policy response from France, the spread could potentially widen further to 200bp. This would be a significant move, as it would put the spread at extreme levels not seen since the 2018 M5S-Lega crisis in Italy, where the BTP-Bund spread moved above 300bp. While a 200bp French spread may seem extreme, it is hardly inconceivable given the underlying problems that have not been addressed.

The trade has indeed become harder, as the underlying issues have not gone away. The French economy continues to face challenges, including a high debt-to-GDP ratio, a sluggish economy, and a lack of political stability. As such, investors are becoming more cautious and are reassessing their exposure to the French economy.