Goldman Sachs and Deutsche Bank are offering investors credit baskets and derivatives tied to the outcome of France's April presidential election, allowing them to take positions on political risk in the country's banking sector.
The instruments, which include some of the riskiest bank debt, give clients exposure to baskets of AT1 bonds — the most junior tier of bank capital — either through direct trading of the underlying securities or via total-return swaps arranged by the banks, according to people familiar with the matter.
Political risk in France is gaining prominence ahead of the presidential vote, with investors focused on how a successor to centrist President Emmanuel Macron will manage a budget deficit exceeding 5 percent, rising debt-servicing costs, and an economy hovering near recession.
"French growth is weakening, fiscal policy remains on an unsustainable path, reform momentum has stalled, and the political outlook appears almost alarming," Berenberg economists led by Holger Schmieding wrote on Friday.
Goldman Sachs is an active participant in the growing credit-basket market. The bank and JPMorgan Chase previously assembled trades enabling investors to gain indirect exposure to private credit through insurers, among the largest investors in the asset class. The two banks also created baskets of listed companies with private-credit exposure.
Deutsche Bank is set to officially launch its Credit-Basket-Platform next month but has already executed trades for individual clients who requested the product directly.
The baskets do not reflect the trading teams' own views and are typically assembled to facilitate client business, said Sean Flanagan, head of DB Investment Solutions. The instruments "were not specifically designed in response to current market events but are available to clients who wish to express different views on the topic," he said.
A Goldman Sachs representative declined to comment to Bloomberg News.
French political developments are increasingly being priced into credit markets and AT1 paper. Risk premia on bonds issued by French banks widened across much of the curve last month, according to data compiled by Bloomberg, while spreads in the broader AT1 market have largely narrowed.
