Portfolio

Bonds: France lives to fight another day

Date: Monday 16 Jan 2012

Bonds: France lives to fight another day

International bond markets were dominated by the successful sale of French short term debt this morning despite the country’s ratings downgrade on Friday. These were the yields and movements on some of the most watched 10 year bonds:

Italy: 6.62% (-2bp)

Spain: 5.19% (-4bp)

France: 3.03% (-4.2%)

Germany: 1.77% (flat)

UK: 1.97% (flat)

US: 1.86% (flat)

Bond markets were closely watched this morning for their reaction to S&P’s downgrade of France late on Friday.

Two things happened.

France conducted a successful auction of €8.59bn worth of bonds. The average yield on one year bonds came in at 0.406%, versus the 0.454% seen at the last auction of these characteristics.

France’ benchmark 10 year bonds also saw their yield drop. So, despite the S&P downgrade, investors obviously believe the risk on French debt has not materially increased.

In other news, the European Central Bank is thought to have been in the market supporting the bonds of distressed Eurozone countries. Italian 10 year bond yields dropped 2 basis points by 5:55pm in Rome, possibly as a result of this action.

But Europe is by no means out of the woods. Another ratings agency, Moody’s, has said that it will provide an update on the ‘outlook’ for France’s sovereign debt rating in the first quarter of this year.

EU bureaucrats had indicated the single currency area might be able to agree on a new, stricter budget rule book by the end of January.

Worth noting, a meeting between Italian Prime Minister Mario Monti, French President Nicolas Sarkozy and German Chancellor Angela Merkel was postponed from January 20th to the end of February, apparently so the French leader can concentrate on his ´home front.´

BS

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