Macron puts Powell in the shade as markets recoil at prospect of RN, torpedoing supply
Having been caught off guard by Macron’s Sunday night gamble, markets’ reaction to the risks this threatens to unleash were initially modest, but fears escalated through the week such that by Thursday they were overshadowing what had hitherto been flagged as the macro event of Q2. Neil Day reports on the fall-out, with insights from Crédit Agricole CIB syndicate, trading and research.
You can download a pdf version of this article in the full BIHC Briefing alongside further coverage.
Trepidation showed signs of turning into capitulation on Friday as dislocations began to crystalise in the face of the surprise French election, which overshadowed encouraging reactions to US data and the latest FOMC meeting to all but shut down new issuance from European banks and threaten ongoing disruptions.
Fears that French president Emmanuel Macron’s general election gamble could lead to a first government of the far-right Rassemblement National (RN) and accompanying fiscal and economic uncertainty sparked a widening in the Bund-OAT spread from inside 50bp beforehand to as wide as 77bp on Friday.
A resistance level of 75bp that had previously held when Macron defeated RN (under its prior Front National guise) candidate Marine Le Pen in 2017 was thus broken, upon opinion polls showing that the tables have turned — with the populism of the only other contender, the leftist Front Populaire coalition that is also ahead of Macron’s party, similarly feared.
The widening accelerated into Friday, prompting French agency Sfil to postpone a new long five year green bond that it had announced just the previous day.
“Thursday and Friday showed early signs of capitulation, with investors derisking portfolios and recalibrating hedges,” said Vincent Hoarau, head of FIG syndicate at Crédit Agricole CIB. “We can’t deny that the premium investors are demanding to own French government bonds or French credits has swollen, with evidence of contagion and new macro trades — in the second half of the week 10 year OAT yields did not move much, same for BTPs, but the 10 year Bund yield fell 25bp with the resurgence of flight-to-quality trades.
“Hopefully we find a catalyst for stabilisation soon,” he added, “otherwise I fear it will not be long before we see a three-handle Bund-OAT spread. The status of France within the Eurozone and capital markets, and growing concerns evident among big French real money investors make the situation serious indeed.”
See page 3 for fuller analysis of RN’s potential impact.
Some French banks’ non-preferred senior bonds were some 20bp wider on the week on average, their Tier 2s 30bp-35bp wider, and AT1s 50bp wider, while the CAC-40 turned negative for the year (compared to around 8% up for the DAX).
“The prospect of two populist blocs from far right and left having the majority in the National Assembly in a matter of weeks is monumental,” said Hoarau (pictured), “and could further hit French credit spreads and French investor appetite for risk assets.”
The impact on the wider market was reflected in the iTraxx Crossover index widening 40bp, including a 22bp move on Friday alone, which represents its biggest one-day move since Credit Suisse. And while traders had been marking spreads wider on few flows earlier in the week, talk of a sell-off emerged.
A small mercy for French banks is that, after heavy front-loading like their peers, most have completed more than three-quarters of their planned funding programmes for the year. However, with potential catalysts for improvement before or upon the French result difficult to identify, primary market conditions could prove prohibitive through to the traditional summer break.
“The market is not closed,” said Hoarau, “and as soon as markets settle down with less instability, issuers, particularly corporates, may well force through trades at some point before the election and it would only be reasonable to try to do so — pay a generous new issue concession and get a deal done rather than wait and potentially pay a bigger premium on a wider secondary market.
“But we have now entered unchartered territory and it is debatable whether such opportunities will arise very soon.”
The French turmoil came just as prospects for a US soft-landing and smoother rate path otherwise promised to see credit markets improve. After US CPI finally came in lower than expected on Wednesday, Federal Reserve chair Jerome Powell, leaving rates alone, struck a balanced tone, with the latest dot plot implying one rate cut this year versus one to two priced in by the market.
The 10 year US Treasury yield fell some 15bp in response, and although the first rate cut from the European Central Bank last week was accompanied by a slightly more hawkish narrative, this gave little cause for concern.
“Outside of the French election — which nobody saw coming — the market was pretty much setting itself up for a summer grind,” said William Rabicano, director, credit trading at Crédit Agricole CIB. “Investors are still long liquidity and cash, and while spreads were a little expensive given that markets have gone in a straight line for six months, they weren’t wildly out of sync.”
Le déluge avant…
Banks had taken advantage of the positive momentum to successfully issue capital instruments upon exiting blackout periods in early May, with both Santander and Erste Group selling AT1 on 7 May.
At €1.5bn, the Spanish bank’s perpetual non-call six new issue was the biggest single-tranche AT1 in euros since it sold a similarly-sized deal in January 2020. Pricing was tightened from the 7.375% area to 7%, deemed to represent a new issue premium of up to 37.5bp, while the book peaked around €4bn and ended at €3.6bn, with some 260 accounts involved.
The 7% coupon is the highest among Santander’s euro AT1 and it came with a higher reset spread than its 4.75% non-call March 2025 AT1, for which a tender was launched alongside the new issue.
“The exercise clearly caught the market by surprise,” said Neel Shah, financial credit analyst at Crédit Agricole CIB (pictured). “That an issuer who has previously been quite stringent about economic calls would take such an action was positively received by the market, and AT1 spreads gapped about 15bp-20bp tighter in response.”
The refinancing cost was meanwhile deemed negligible and the level perceived as investor-friendly.
Erste also sold its €750m perpetual non-call 7.4 AT1 in tandem with a tender for an outstanding, €500m 5.125% non-call 2025, AT1, and was able to tighten from the 7.625% area to 7%.
A week later, on 13 May, Intesa Sanpaolo hit the same 7% coupon level on a €1bn perpetual non-call eight AT1, tightening pricing from the 7.5% area on the back of some €3.75bn peak demand and paying a new issue premium in the single-digits.
Deutsche Bank then achieved the biggest book in the series of euro AT1, attracting some €9bn of orders to a €1.5bn 8.125% perpetual non-call 5.8, tightening from the 8.75% area but also paying a chunkier NIP of up to 37.5bp.
The market’s peak was marked by a €750m perpetual non-call seven AT1 for BBVA on 4 June. Although the Spaniard tightened from IPTs of the 7.375% area to achieve a coupon inside 7%, of 6.875%, the book dropped from a peak of around €3.4bn to around €1.15bn.
NatWest and DNB had meanwhile turned to the US dollar market for $1bn (€930m) and $700m, respectively, of AT1 on 7 and 23 May. The UK bank opted for a perpetual non-call 10 structure and tightened pricing from the 8.75% area to 8.125%, while the rare Norwegian perpetual non-call 5.5 fully IG AT1 attracted some $3bn of orders, allowing DNB to tighten from the 7.875% area to arguably inside fair value at 7.375% in its first dollar AT1 since 2019.
“They are basically the only issuer of AT1 in Norway,” said Mateen Ahmad, executive director and FI trader at Crédit Agricole CIB, “and are seen as a very safe pair of hands. The deal is a core holding for a lot of investors, and interestingly they saw a lot of take-up in the US, not just Europe.”
The strong AT1 supply was accompanied and indeed pre-empted by brisk Tier 2 issuance, with Bank of Ireland kicking off the month’s activity on 2 May with a €500m 10.25 non-call 5.25. On the back of some €3.4bn of orders, the Irish bank was able to tighten pricing from IPTs of the 220bp area to 185bp, implying a negative new issue premium.
Nordea set a high water mark for Tier 2 on 21 May, taking advantage of a peak €3bn book and final €2.7bn book to tighten pricing for a €750m 11 non-call six from IPTs of the 170bp area to 135bp — the tightest spread on a euro Tier 2 since 2021, although one Commonwealth Bank of Australia was able to match the following day on a €1bn 10 non-call five Tier 2.