Wall Street has begun converting next year's French presidential election into a tangible trading strategy for investors, allowing them to position for various political scenarios regardless of the expected outcome. According to sources familiar with the matter, Goldman Sachs Group Inc and Deutsche Bank AG are now offering bundled packages of French bonds—including some of the riskiest bank debt—that enable clients to profit from or hedge against different political results. These portfolios allow investors to take long or short positions on baskets containing Additional Tier 1 (AT1) bank securities, without even needing to hold the underlying bonds directly.
Sources indicate that investors can gain exposure by trading the underlying bonds or through derivative structures such as total return swaps (TRS) arranged by the banks. With the presidential election scheduled for next April, French political risk is increasingly becoming a focal point on credit investors' agendas. The core concern in the market centers on how the successor to pro-business centrist Emmanuel Macron will handle a fiscal deficit exceeding 5%, rising debt interest costs, and an economy hovering on the brink of recession.
Economists at Berenberg, including Holger Schmieding, wrote in a report last Friday: France's economic growth is grinding to a halt, fiscal policy remains on an unsustainable trajectory, reform momentum has stalled, and the political outlook appears quite daunting.
Where the risk is showing up
French AT1 bonds have notably underperformed over the past month. Goldman Sachs has been an active player in the expanding market for credit portfolios. Earlier, the bank, along with JPMorgan Chase & Co, had structured trading baskets that allowed investors to place indirect bets on private credit through insurance companies, which are among the largest holders of that asset class. Both banks have also created portfolios of publicly listed companies with exposure to private credit.
Deutsche Bank is set to officially launch its credit portfolio platform next month, but has already been actively constructing trades for individual clients who submitted direct custom requests. These baskets do not represent the trading desk's own views; they are typically designed simply to facilitate client transactions. Seán Flanagan, Deutsche Bank's global head of investment solutions, noted that these portfolios are not specifically crafted in response to current market events, but can be offered to clients who wish to express a variety of views on the theme.
Data shows that French political factors have been steadily seeping into the credit market, with the impact most visible in AT1 bonds. Over the past month, while spreads across the broader AT1 market have mostly tightened, risk premiums on French bank bonds have widened across most of the yield curve.
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