Bloomberg News

French, Spanish Bonds Fall as S&P Reviews Ratings, Before Summit

December 07, 2011

Dec. 6 (Bloomberg) -- French government bonds dropped, leading declines among euro-area government securities, after Standard & Poor’s said it may lower credit ratings across the region.

Spanish and Austrian bonds slid after S&P said 15 euro nations may have their rankings lowered as “continuing disagreements” among policy makers on how to tackle the debt crisis risks damaging their financial stability. France’s two- year note yield rose from a one-month low after German Finance Minister Wolfgang Schaeuble said the downgrade warning will help force European leaders to ratchet up efforts to resolve the two- year old crisis at a Dec. 8-9 summit.

“The digestion of the ratings news has raised the stakes for the summit,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “The debt crisis and the outcome of the meeting of politicians on Friday is the focus for the markets. There was a rally last week on expectations of a positive outcome from this meeting and we see risk for a setback there.”

French 10-year yields advanced 11 basis points to 3.24 percent at 4:49 p.m. London time. The 3.25 percent security due October 2021 fell 0.88, or 8.8 euros per 1,000-euro ($1,338) face amount, to 100.095. Two-year yields climbed four basis points to 1.13 percent.

Two-year French notes and 10-year bonds rose the most in at least five years last week amid optimism that Europe is ready to act to stem the crisis.

‘Dramatic Move’

Ratings may be cut by one level for Austria, Belgium, Finland, Germany, the Netherlands and Luxembourg, S&P said yesterday. The company said it may lower the ratings of Estonia, France, Ireland, Italy, Malta, Portugal, Slovakia, Slovenia and Spain by up to two notches.

“It’s a dramatic move,” said Padhraic Garvey, head of developed-market debt strategy at ING Groep NV in Amsterdam. “It makes it very difficult for a recovery of investor sentiment and it piles further pressure on legislators, which may be a good thing in the end. In order to reverse this, we need an incredibly positive outcome from the summit.”

Austria’s 10-year yields climbed six basis points to 3.22 percent, while its two-year note yields advanced five basis points to 1.23 percent.

Spanish two-year rates increased 10 basis points to 4.01 percent, while 10-year yields gained nine basis points to 5.21 percent. Italy’s two-year yields were three basis points higher at 5.59 percent after rising 19 basis points to 5.75 percent.

No Trust

“The truth is that markets in the whole world right now don’t trust the euro area at all,” Schaeuble said today in Vienna. S&P’s statement will prompt European leaders “to do what we’ve promised, namely to take the necessary decisions step-by-step and to win back the confidence of global investors.”

Government bonds from Italy and Spain rallied yesterday as German Chancellor Angela Merkel and French President Nicolas Sarkozy pushed for a rewrite of the European Union’s governing treaties to tighten economic cooperation as a first step toward ending the debt crisis.

With the fate of the currency shared by the 17 euro states at risk, Merkel and Sarkozy are stressing their common platform before this week’s summit that aims to end the crisis that’s now in its third year.

U.S. Treasury Secretary Timothy Geithner is due to arrive in Frankfurt today to meet political leaders and the European Central Bank, which holds a policy meeting on Dec. 8.

ECB Rates

The ECB will lower its benchmark rate by a quarter point to 1 percent, according to 53 of 58 economists in a Bloomberg News survey. Two said the central bank will cut rates to 0.75 percent, and three estimate it will leave them at 1.25 percent.

The central bank unexpectedly lowered interest rates on Nov. 3, saying the 17-nation euro-area economy will probably suffer a “mild recession.”

German 10-year bund yields were two basis points lower at 2.19 percent after climbing six basis points to 2.27 percent. The nation’s two-year note yields stayed at 0.34 percent.

Euro-region gross domestic product expanded 0.2 percent in the third quarter from the second quarter, data showed today, confirming an initial estimate published on Nov. 15. Exports increased 1.5 percent from the second quarter, when they gained 1.1 percent, while household spending advanced 0.3 percent.

Bailout Fund

Downgrades of Germany and France would affect the rating of the European Financial Stability Facility, the bailout fund for struggling euro member countries that has funded rescue packages for Greece, Ireland and Portugal partially through bond sales. If the EFSF has to pay higher interest on its bonds, it may not be able to provide as much funding for indebted nations.

S&P may lower the credit rating of the bailout fund, Moritz Kraemer, head of sovereign ratings at the company in New York, said on a conference call today.

Yields on EFSF 3.375 percent bonds due July 2021 were two basis points higher at 3.65 percent, Bloomberg data showed.

Volatility on French debt was the highest among 24 developed nations tracked by Bloomberg today, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps. The move in 10-year yields was 1.5 times the 90-day average, the gauge shows.

German bonds have returned 7.2 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. French bonds have gained 3.5 percent, Italian bonds declined 4.9 percent and Spanish bonds advanced 6.1 percent.

--Editor: Matthew Brown

To contact the reporters on this story: Emma Charlton in London at echarlton1@bloomberg.net; Paul Dobson in London at pdobson2@bloomberg.net.

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net


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