AFS Markets Blog: Midday 19/08/2026

• Meanwhile in markets, on an otherwise quiet day, OATs are in the hot seat. A few more basis points of spread widening and the 10y spread – Le Spread – will be at its highest level since the Eurozone crisis;

• The drivers for OAT Bund spread widening are all too familiar: the budget and next year’s Presidential election. Regarding the latter, because of the summer lull in French politics we haven’t had a poll or any news in a while. From the old (but certainly not stale) polls we’ve learned that whoever the far right National Rally fields as candidate – Marine Le Pen or Jordan Bardella – either will win both the first and second round. Le Pen, the party’s first choice candidate, is seen as a populist economically speaking while Bardella has more conservative credentials in this regard. Regardless of either candidate’s economic policy preferences, neither is advocating austerity to get France’s government finances under control. However, don’t count on the (far) left or what remains of the mainstream parties to show an inch of fiscal rigor. Successive mainstream party-led governments have all let the fiscal situation get out of hand;

• And speaking of France’s fiscal situation (quite dire), the hapless government of Prime Minister Lecornu has telegraphed multiple times that the 2026 deficit target of a headline deficit slightly below five percent of GDP will likely not be met. Likely, the deficit will likely arrive at 5.2% of GDP, a tenth of a percentage point higher than last year – we’re splitting hairs here. Still, that was an improvement compared with a nearly six percent deficit in 2024. In any case, it will be hard for Prime Minister Lecornu to pass a budget for 2027 in time in the first place. And a budget that cuts the deficit only marginally will be harder still;

• For the record: 10y OATs trade as if France was a triple B rated nation while it should be a good 40bps lower based on its double A rating. If the spread widens further, France would trade like junk. Which, for a wealthy and productive economy, is completely unjustified. Actually, I think the spread should narrow. But I’ve been wrong about that for quite some time;

• Interestingly, punters are remarkably unperturbed by German political risks. Recent polls show that the far right AfD’s national lead has widened, with the party in all likelihood providing the next Chancellor of Germany;

• Germany will hold three state elections in the remainder of the year, all in September. In one of the states, Saxony-Anhalt, the AfD is expected to win an outright majority. If the party leads the next state government – either alone or with (tacit) support from other parties – punters would like to know if the party moderates or not. Having said that, the next federal elections will be held in 2029. Assuming that the current ‘grand coalition’ of the center left SPD and center right CDU/CSU holds together;

• Mind you that the German fiscal position isn’t that much better than France’s. Yes, France’s debt ratio of an expected 119 percent of GDP this year is almost twice as high as Germany’s. However, the French budget deficit is only a percentage point higher than Germany’s. I can’t stress enough that the days of Germany’s fiscal ‘specialness’ are completely gone. At current market interest rates, its debt is just as unsustainable as most other developed nations;

• Bottom line, times in Europe have changed in many ways. For example, if EU parliament elections were held today, the largest three parties would all be far right: France’s National Rally; the AfD in Germany; and Brothers of Italy in Italy;

• Concluding with some broader market commentary, US Treasury yields have edged below yesterday’s highs but are off the lows. The dollar is mixed, rising further versus EM currencies while doing the exact opposite versus the majors. EURUSD is back at the 1.16 handle while USDJPY which is trading in the low 159s, is a hair away from the 158 handle. • Elsewhere, European equities move little while S&P 50 futures have sagged marginally;

• Last but not least are energy prices. At 63.54 euros per MWh, Dutch natural gas futures are at the highest level since last March. Brent crude futures have edged up to the $92 handle. Iran headlines make it crystal clear that the US and Iran remain at loggerheads about most things. But what hasn’t happened (yet), is a return to fighting: the tit-for tat strikes that ended weeks ago without a formal deal. How quaint;

• Looking ahead, besides the minutes of the contentious July FOMC meeting there’s nothing to look forward to. The calendar for the rest of the week is unexciting too. Focus will turn to next week’s Jackson Hole event, where Fed Chairman Warsh is likely to speak… more about family fights.

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