French Crisis Contagion Contained... For Now; Citadel Securities Warns Higher-For-Longer Pain Is Locked In

Authored by Frank Flight, Citadel Securities head of Macro Strategy,

The widening in French government bond spreads appears quite dramatic on a standalone basis, but when compared with historical analogues using our European financial conditions framework, it looks broadly comparable with the stress imposed by previous episodes of sovereign stress and monetary tightening, while remaining less severe than during the pandemic or the European Sovereign Debt Crisis. This is because contagion to the wider euro area, while notable, appears relatively contained according to our decomposition. The speed of the widening in French spreads, which we consider may have been driven in part by deleveraging in front-end asset swaps, arguably lowered the bar for relief following the more constructive tone from Marine Le Penn. However, we see limited scope for spreads to return to the levels that prevailed before this episode and instead expect this higher and wider trading range to persist for some time.