Ask 10 investors, bond issuers and issuing houses which benchmark yield spread they look at to judge the relative value of a bond, and you may get 10 different answers. That is the joy of the new euro landscape, in which at least four governments are competing to have their bonds represent the benchmark rate on at least one point of the yield curve.
The natural benchmark should of course be the German government curve, since Germany is regarded as the best credit in euroland. But a glance at the French and German government yield curves shows that there are anomalies and strange spread differentials, widest at seven years (where the Bund is cheaper than the OAT by 14 basis points) and 30 years (where the OAT is 19bp cheaper, see chart).
Seven-year glitch
"There's no natural spread between France and Germany," says Luca Jellinek, bond analyst at Paribas in London, "it varies from bond to bond." To illustrate his point he mentions the rumour that the old 10-year OATs of 2008 have been "put away by French insurance companies", so they're expensive and difficult to short.