Long 10Y OAT vs. OLO

Following the ongoing political turmoil in France, investor focus has shifted to the deterioration of French public finances and the upcoming 2025 budget, leading to underperformance of the OAT curve relative to other semi-core and peripheral bonds. This has allowed Belgian government bonds ( OLO s) to outperform French OATs, with the 8-10y OLO trading 15-20bp below OATs for the first time since early 2022. Despite potential rating downgrades for both countries, we believe the downgrade risk for France is better priced than for Belgium, suggesting OATs are relatively cheap. We recommend going long OAT 05/34 vs. short OLO 06/33 at a spread of 2 2 bp, targeting a tightening to 1 0 bp with a stop-loss at 2 7 bp.