On Monday we brought you the latest from France, where fast approaching Presidential elections have been overshadowed by tension in the Korean Peninsula and airstrikes on Syria.

While we don’t know whether the US will engage Bashar al-Assad further or whether Kim Jong-un is on the verge of getting himself DEVGRU‘d, we do know that some folks are going to be voting in France and the outcome is anything but certain as indicated by (among other things) the ISDA basis…

ISDA

For their part, Goldman recommends shorting OATs (see linked post above). But there’s more than one way to skin a cat. Below, find a summary of Street recos on how to play/hedge the biggest political risk in the developed world:

Via Bloomberg

With the first round of France’s presidential election drawing near, and risk slowly creeping back into markets, banks recommend selling the country’s bonds, or hedging exposure to its debt.

  • Deutsche Bank doesn’t rule out a surprise outcome and keeps a short position on 3-year OATs heading into the first round of the vote
  • JPMorgan hedges its long exposure to the country with non- France core wideners
  • Deutsche Bank (strategists including Francis Yared)
    • A historical analysis of the French presidential elections indicates that the current gap between the main candidates is not large enough to exclude a surprise
    • From a market perspective, the lower probability/high impact surprises would be, on the negative side, a second round between Mélenchon and Le Pen and, on the positive side, a second round between Fillon and Le Pen
    • The bank maintains short 3-year France, which provides a convex hedge against increased political risk in the country and with limited downside, given the potential repricing of the ECB after the election
    • Maintains Eonia 2y1y-4y1y steepener as the pace of rate hikes priced by the market remains too low
    • Maintains Italy 5s30s steepener as a positive-carry bearish trade on Italy
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