FR x GE 10y

I don’t think France’s finances are better than Germany’s, but odds of a French default are minimal to non-existent. I do believe, though, that the path of the spread between 10y German bonds and 10y French bonds should be bumpy.

If the past 5 years are a guide, we’re much closer to 11y lows in the spread (+18bp) than the highs (+80bp). Highs in last 30 years range from pre-Eurozone +100bp to Greek crisis’s (2011) +160bp.

Odds of French 10y trading inside German 10y are extremely low in my view and, gun to head, if that happens, with the data we have now on finances, demographics, culture, politics… I’d have this trade on in very large size. At current levels of +26bp (FR – GE) I entered the trade in small size to have a bit of skin in the game, to watch it more closely.

I posted the chart on Twitter.

Here’s Alex‘s welcomed pushback:

And my response:

Certainly won’t hold this to maturity, but I do believe risk perception of France relative to Germany floats around, giving the trade an opportunity. This is a bet to scale into. Not a long-term trade, but a bet that, if traded around, has high probability of being profitable.

Relevant Qs:
– Is there a superior trade to express the view?
– Is this a waste of time (“scalping”)?
– A new round of ECBs QE will make european spreads to German bonds go back to lows or flat, like 2007?

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Feel free to get in touch. I will surely answer you when I find some time. A brief introduction would be welcomed.