06:57 AM EDT, 08/28/2025 (MT Newswires) -- The OAT/Bund spread blew out further on Wednesday, breaking above the 80bps level for the first time since January, surpassing the closing highs set in April during the risk-off episode related to United States President Donald Trump's so-called Liberation Day tariff announcements, said MUFG.

The scale of the move this week (12bps widening) is the biggest move since the political turmoil that began in June last year, wrote the bank in a note. ING doesn't see this escalating to such an extent that it impacts the EUR/USD rate, in part given the negative risks on the US dollar (USD) side were likely to prove more compelling.

In June last year, the OAT/Bund spread widened out sharply from 48bps on June 6 to a high of 82bps on June 27 as investors priced in the political risks associated with the snap election called by President Emmanuel Macron on June 9. Over the same period, EUR/USD dropped by around two big figures.

In terms of G10 FX performance over that period, the euro (EUR) ranked in the middle amongst the other G10 currencies. So even in that more extreme scenario, the overall currency impact was relatively muted, pointed out MUFG. Of course, no two times are the same and in the context of the advance of EUR/USD this year, there is scope for a bigger negative reaction if the political landscape becomes "severe."

However, the most likely scenario from here still seems a rerun of what happened in December last year when former Prime Minister Michel Barnier was forced to resign due to the failure to get the 2025 budget through parliament. That saw the OAT-Bund spread widen out to the current closing high of 88bps, a level that could certainly be broken in the current episode, stated the bank.

It seems highly likely that current PM Francois Bayrou will lose the parliamentary confidence vote on Sept.8, with opposition parties already indicating a plan to vote against. President Macron will then likely look to repeat the same again by choosing another candidate for PM and trying once again.

What is clear from this is that France is in policy gridlock and the prospects of any meaningful fiscal consolidation ahead of the presidential election in 2027 are slim, added the bank.

So fiscal risks are certainly high, although ING argues that isn't exactly a new realization and this move wider for the OAT/Bund spread is more a reflection of a positioning flush out after the spread had narrowed through to recent year-to-date lows. There are some upcoming sovereign rating reviews that could result in downgrades. Fitch Ratings is scheduled to provide its updated review on Sept. 12.

From a Japan flow perspective, the political uncertainties last year did prompt a significant sell-off of French debt held by Japanese investors, noted MUFG. In fact last year, Japanese investors sold on the most sustained basis on record, with selling every month from May through to January this year, with a cumulative five trillion yen worth of long-term debt sales.

Since then, there has been only a partial reversal of that selling, with 760 billion yen worth of buying.