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.
That, ladies and gentlemen, is a record.
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.