Wall Street brings the French election to the betting table! Goldman Sachs and Deutsche Bank bundle French bank bonds, with AT1 bonds becoming a new chip.

Notably, Wall Street is turning next years French election into a trading strategy for investors, regardless of their expectations for the election outcome. According to informed sources, Goldman Sachs and Deutsche Bank are offering a range of French bond portfolio packagessome including the riskiest bank debtsthat allow investors to profit from or hedge against various political outcomes. These packages enable investors to take long or short positions on portfolios that include Additional Tier 1 (AT1) bank securities, even without directly holding these bonds. Sources indicate that investors can gain risk exposure through trading the underlying bonds or through derivatives such as Total Return Swaps (TRS) arranged by banks. As the presidential election in April approaches, political risk in France is gradually becoming a focal point on the agenda for credit investors. The core market focus is on how the pro-business centrist successor to Emmanuel Macron will address a fiscal deficit exceeding 5%, rising debt interest costs, and an economy teetering on the brink of recession. Economists at Berenberg, including Holger Schmieding, wrote in a report last Friday: Frances economic growth is stagnating, fiscal policy remains on an unsustainable path, reform momentum has stalled, and the political outlook seems quite daunting. French AT1 bonds have performed poorly over the past month. Goldman Sachs has been an active player in the expanding credit portfolio market. Previously, the bank and JPMorgan had assembled trading portfolios allowing investors to indirectly bet on private credit through insurance companies, which are among the largest holders of this asset class. The two banks also created investment portfolios of public companies with exposure to private credit. Deutsche Bank will officially launch its credit portfolio platform next month, but it has already been actively creating trades for individual clients with specific customization requests. Such portfolios do not represent the views of the trading desk itself and are typically designed solely to facilitate client trading. Sean Flannery, Global Head of Investment Solutions at Deutsche Bank, stated that these portfolios are not specifically designed to address current market events, but can be provided to clients looking to express various views on the subject. Data shows that political factors in France have been seeping into the credit market and are reflected in AT1 bonds. Over the past month, even though spreads in the broader AT1 market have largely narrowed, the risk premiums on the countrys bank bonds have widened across most of the yield curve.