Macro Recap

Prolonged US-Iran confrontation – Attacks on oil tankers and regional energy infrastructure has sent Brent above $100/bbl. Iran asserts to hold enough missiles for a prolonged conflict meanwhile Trump’s statement also signaled no closure of the war until the midterm election, indicating that elevated energy costs will persist for the short term. 

US strong job market data – August payrolls rose 162k versus 56k expected, unemployment held at 4.1% and prior months were revised +55k. Trump and Vance continued to call for rate cuts. Focus on Friday CPI, with consensus of 3.4% YoY for the headline and 2.4% YoY for the core, shall decide whether FOMC holds or hikes next week. 

Disappointed UST buyback – The announced $6bn buyback size tripled the prior amount but fell short of more aggressive market expectation of $10bn, sending global rates sold off.

Strengthened Yen amid policy normalization – Yen strengthened to 153-154 level, almost 4% gain MTD. Growing expectation for BoJ rate hike drove a sharp reversal., supported by upward revised 2Q GDP of 1.4%. 

Rates & Credit

Significant global rates sold off on prolonged inflation, strong job data and disappointed UST buyback 

Central Banks “queue up” for September rate hikes – ECB (100%), Fed (63%), BoJ (96%), RBA (73%)

Heavy primary issuance in both US and Europe – Issuers seize tight spread window ahead of rate hikes while lower funding costs in Europe attract sizable US issuers (Amazon, Uber, FedEx, etc) 

10Y UST: 4.85% (+10bps MTD, +68bpsYTD)

10Y Bund: 3.44% (+12bps MTD, +59bpsYTD)

10Y JGB: 2.91% (-2bps MTD, +85bps YTD)

EUR IG OAS: 81bps (+1bpMTD,+1bpYTD)

EUR HY OAS: 285bps (+9bpsMTD,+5bpsYTD)

USD IG OAS: 79bps (+1bp MTD, +1bpYTD)

US HY OAS：270bps (+10bpsMTD,+2bpsYTD)

（ As of 2026/9/10）

France

A Durable Fiscal and Political Risk Premium

Mid-to-Long Term Fiscal Risk – The 2026 deficit target of 5% of GDP is difficult to achieve (bbg consensus 5.1%), on weaker growth, rising interest costs, higher government spendings (energy subsidies, defense, etc), without meaningful deficit reduction amid political constraint. To be negotiated in Oct, the 2027 budget will probably be passed but will not deliver a decisive fiscal turnaround (5.2%-5.3% as the base case), amid a hung Parliament. Under current trajectory, SG forecasts that French debt could rise towards 130% by 2030, approaching Italian levels and at least 4ppt of GDP of fiscal tightening would be required to bring the primary deficit close to balance.

Political Constraint -  France enters the 2027 presidential election amid this fragile fiscal position. Latest polls showed far right leader of the RN party Le Pen in the lead  (30%-35%) well ahead of Philippe (centrist) and Mélenchon (far-left), both at around 15-20%. From market perspective, Parliament matters more than the presidency – whether the next President can secure a workable majority in the National Assembly to deliver required fiscal adjustment. Among the three political blocs, a centrist candidate is viewed as the most market friendly the far left as the least favorable, while RN lies in between given its moderated anti-euro position and more responsible fiscal stance. 

Rating Downgrade Risk -  Expect Moody’s to downgrade France in its October review from Aa3 Neg to A1 Sta, to align with S&P and Fitch, on continued difficulties to materially reduce its fiscal deficit as one of the downgrade triggers. Nevertheless, the market implication should be limited. Fitch affirmed the rating in Aug and S&P shall conduct review in Nov. 

Recommendation (UW)

OAT – Medium-term bearish on OATs on its fundamentals given persistent fiscal concerns and political uncertainty ahead of presidential election next year. 10y OAT-Bund spread could widen to 100bps in a hung Parliament or a suspicious RN-led government scenario. In an improved centrist election prospect, spread could stabilize around 60-70. 

French Credit -  French Banks remain the highest-beta exposure to French political risk. A sustained widening in OAT-Bund can raise wholesale funding cost. However, French credit’s risk premia have not kept pace with the recent OAT underperformance and could face further spread widening risk. Other sensitive sectors include building materials, utilities, infrastructure, and quasi sovereign entities.