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French Bonds Drop on Moody’s Downgrade; Greek Debt Rises

November 20, 2012

France’s Bonds Drop After Moody’s Cuts Rating

A pedestrian walks past empty tables outside the Le Commerce cafe in Paris. Photographer: Balint Porneczi/Bloomberg

France’s government bonds fell, with 10-year yields rising the most more than in six weeks, after Moody’s Investors Service lowered the nation’s top credit rating, citing a worsening economic growth outlook.

Greek and Portuguese debt advanced as European finance ministers prepare to meet in Brussels today to discuss aid for Greece. The yield premium, or spread, investors demand to hold French 10-year securities over similar-maturity German bunds, widened for the first time in four days after Moody’s yesterday cut the country’s rating to Aa1 from Aaa and maintained its negative outlook. Spain’s notes rose as it sold 4.94 billion euros ($6.33 billion) of bills.

“In some ways this was expected but it’s another sign that things continue to deteriorate in Europe,” said John Wraith, a fixed-income strategist at Bank of America Merrill Lynch in London. “The downgrade raises concerns about the structure of the euro zone and adds more of a burden on to the shoulders of German sovereign creditworthiness.”

France will drop out of the bank’s AAA bond index after the downgrade, Wraith said.

The yield on French 10-year bonds climbed eight basis points, or 0.08 percentage point, to 2.15 percent at 4:46 p.m. London time, the biggest rise since Oct. 5. The 2.25 percent security maturing in October 2022 fell 0.69, or 6.90 euros per 1,000-euro face amount, to 100.88.

French Spread

The spread between the securities and 10-year German bunds widened two basis points to 73 basis points.

The Moody’s decision follows one by Standard and Poor’s in January and increases pressure on President Francois Hollande to find ways to bolster growth. S&P cut the nation’s rating by one level to AA+ from AAA on Jan. 13.

France’s two-year note yield climbed four basis points to 0.15 percent, the largest increase since Oct. 17.

European Union finance chiefs will try to plug a 15 billion-euro hole in Greece’s finances. Last week they gave the nation an extra two years to reach budget-deficit goals, even as the International Monetary Fund disagreed over extending the deadline.

Greek bonds due in February 2023 rose for an eighth day, matching the longest run of gains since the debt was restructured in March. The yield on the 2 percent security due in February 2023 dropped 13 basis points to 17.10 percent, leaving the price at 32.84 percent of face value.

Portuguese Bonds

The rate on Portuguese bonds due in October 2023 dropped 27 basis points to 8.20 percent, after touching 8.05 percent, the least since Oct. 30.

Volatility on Portuguese bonds was the highest in euro- region markets today, followed by those of France, according to measures of 10-year or equivalent-maturity debt, the spread between two- and 10-year securities, and credit default swaps.

Portugal’s economic recovery program is “broadly on track, despite stronger headwinds” to growth, the IMF, the European Central Bank and the EU said yesterday in a joint statement.

The so-called troika also said Portugal “should gradually return to positive quarterly growth rates” next year.

French debt maturing in a year or more has surged since it was downgraded by S&P in January, returning more than double the gains for the rest of the global government bond market, and beating AAA rated Germany, the U.K. and Australia, according to Bank of America Merrill Lynch indexes.

‘Over-Reaction’

About half the time, government bond yields move in the opposite direction suggested by new ratings, according to data compiled by Bloomberg in June on 314 upgrades, downgrades and outlook changes going back to 1974.

“Any over-reaction and selloff today in France is perhaps a buying signal because historically you get downgraded, you don’t widen, you tighten,” Bill Blain, a strategist at Mint Partners Ltd. in London, said today in an interview with Mark Barton on Bloomberg Television’s “Countdown.” “I don’t think there’s any reason to think that fundamentally France should be widening dramatically yet.”

French debt returned 9.4 percent between Jan. 13 and Nov. 19, according to the Bank of America indexes. In the same period German bonds advanced 3.4 percent, U.K. gilts rose 2.8 percent and Australian debt returned 6.7 percent. Global sovereign bonds have gained 4.1 percent since Jan. 13, the indexes show.

Downgrade Risk

The risk of rating downgrades in other so-called core countries during coming quarters remains high, given that Moody’s changed outlooks of Germany and Netherlands to negative in July, Christoph Rieger, head of fixed-income strategy at Commerzbank AG in Frankfurt, wrote in a client note today.

German 10-year yields were six basis points higher at 1.42 percent. The rate dropped to 1.31 percent on Nov. 13, matching the lowest since Aug. 31. Two-year yields added two basis points, rising to zero percent for the first time since Nov. 5.

Germany is scheduled to auction 4 billion euros of 10-year bunds and 1 billion euros of inflation-linked debt maturing in 2018 tomorrow.

Spain allotted 4.22 billion euros of 12-month bills at an average yield of 2.797 percent. It last sold one-year debt at 2.82 percent on Oct. 16. The nation also auctioned 713 million euros of 18-month securities today, at 3.03 percent.

Spanish two-year notes advanced, pushing the yield down 12 basis points to 3.21 percent.

The Madrid-based Treasury, which has already completed its 2012 bond issuance program, is scheduled to auction as much as 3.5 billion euros of debt maturing in 2015, 2017 and 2021 on Nov. 22.

German bonds returned 3.9 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities gained 2 percent, and French debt earned 9.2 percent.

To contact the reporters on this story: David Goodman in London at dgoodman28@bloomberg.net; Neal Armstrong in London at narmstrong8@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net


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