This may be “familiar behavior for the credit market”, as BofAML puts it, but I can’t help but flag this as a pretty alarming indicator regarding the credit risk surrounding the upcoming French elections.
So this is the correlation of iTraxx Main spreads to OAT-bund spreads. In other words, this is the correlation between €IG credit risk and the relative riskiness of French sovereign debt versus German sovereign debt.
(BofAML)
That, ladies and gentlemen, is a record.
Via BofAML
French elections continue to garner much of the credit market’s attention. Although 1st round elections are still 10 weeks away, the credit market has gravitated towards using OATs as a barometer for spreads. Chart 7 shows the 1m rolling correlation between iTraxx Main spreads and 10yr OAT-Bund spreads, using 1min data intervals. Note the correlation has risen consistently since the start of the year and touched a record (92%) shortly after the start of the month.
The interesting thing is the spread value is due to two factors. 1) The impact of the elections going to Le Pen and 2) The probability of the elections going to Le Pen. I have to believe that “1” has stayed within a fairly narrow range and what is driving the change is an increased probability of “2”.