Wall Street takes the French election to the gambling table! Goldman Sachs and Deutsche Bank package French bank bonds, and AT1 bonds become new bargaining chips

The Zhitong Finance App notes that Wall Street is turning next year's French election into a trading strategy for investors, regardless of their expected election results.

According to people familiar with the matter, Goldman Sachs Group and Deutsche Bank are offering a range of French bond packages — which include some of the riskiest bank debts — to allow investors to profit or hedge risks using different political outcomes.

These packages allow investors to go long or short on portfolios that include “Additional Tier 1 Capital” (AT1) bank securities without even having to directly hold these bonds. People familiar with the matter said that investors can obtain risk exposure by trading underlying bonds or derivatives such as total income swaps (TRS) arranged by banks.

Ahead of the presidential election in April next year, political risk in France is gradually becoming the focus of credit investors' agendas. The market's central focus is on how the pro-business neutral Emmanuel Macron's successor will deal with fiscal deficits of more than 5%, rising interest costs on debt, and an economy hovering on the brink of recession.

Economists at Berenberg, including Holger Schmidin, wrote in a report last Friday: “France's economic growth is at a standstill, fiscal policy is still on an unsustainable track, the momentum of reforms has stalled, and the political outlook looks quite frightening.”

French AT1 bonds have not performed well in the past month

Goldman Sachs has always been an active player in the expanding credit portfolio market. Previously, the bank and J.P. Morgan Chase formed a trading portfolio to allow investors to place indirect bets on private credit through insurance companies, which are among the largest holders in this asset class. The two banks have also created portfolios of publicly traded companies that are exposed to private credit risks.

Deutsche Bank will officially launch its credit portfolio platform next month, but has previously been active in creating transactions for individual customers with direct customized requirements.

Such combinations do not represent the views of the trading desk itself; they are usually only intended to facilitate transactions for customers.

Shawn Flanagan, global head of investment solutions at Deutsche Bank, said these portfolios “are not specifically designed to respond to current market events, but they can be provided to customers who want to express a variety of views on the subject.”

The data shows that French political factors have been penetrating the credit market and are reflected in AT1 bonds. Over the past month, the risk premiums on most of the yield curves of the country's bank bonds have widened, although interest spreads in the wider AT1 market have mostly narrowed.