ITC – OATs: the importance of the upcoming C&R

For many, many years the French OAT market has run an Apr/Oct coupon cycle for its bonds and these pay/mature on the 25th. Thus twice per year, there is always large coupons and often a large redemption.

As a result of the heavy concentration of payments, traders and strategists get excited and invariably lean bullish on the OAT market around the payment dates. This year is no different with a €27.5bn redemption and €13.7bn of coupon payments – roughly €41bn in total. Perhaps the timing of some of the buying may be altered by the PSPP holdings but most will still be in private hands and available to reinvest.

We went back through the last 10 years of data for both the Apr and Oct (20 data periods) to understand how the Bund-OAT spread behaved over the payment. The chart below shows that there does appear to be something in it. Around 4 business days before the payment the spread starts to tighten (the mean is 2bp) and then it re-widens again around 3 days later.