Mind The “Le Spread” Euphoria

Earlier today we noted the “big league” compression in the all-important OAT-bund spread, the market’s preferred gauge of French political risk and thus, a go-to measure of EMU breakup risk.

Here’s the 10Y spread:

And the 2Y spread:

Finally, here’s Bloomberg’s technical analyst Sejul Gokal on why this matters:

OAT Futures and ‘Le Spread’ Euphoria May Risk Fading at 200-DMA

Notable moves in OAT market have sent futures and France-Germany 10-year yield spread near key equilibrium levels that may drive tactical reversal in post-French vote reaction, Bloomberg technical analyst Sejul Gokal writes.

OAT1 topside gap and high at 149.90 close to the YTD high and 200-DMA at 150.08-12; levels could still come into play in a last gasp move before potential accumulation of overbought reversal sessions
- 9-day RSI tests multi-mo. highs at ~81
OAT-Bund spread narrowed to 48bps vs. 64bps Fri. close
- 200-DMA at 45bps could limit further spread compression as oversold conditions warrant corrective unwind
As a risk factor, watch out for any consecutive daily breaks of the longer-term average line which should indicate strong behavioral change in OATs; such development should override current overbought market warnings

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Props to Sejul on the title there….