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Bonds: Debt markets stable despite S&P downgrade threat

Date: Tuesday 06 Dec 2011

Bonds: Debt markets stable despite S&P downgrade threat

International sovereign debt markets appear to have been relatively unscathed by the announcement last night that Standard and Poor’s, the credit ratings agency, is putting 15 of the 17 countries which use the euro currency on “negative credit watch.”

This move could undermine the fire power of the bailout system the Eurozone has constructed, called the European Financial Stability Facility, by limiting the amount it can borrow on open markets.

The fact that Europe’s two biggest economies, Germany and France, are both now threatened with losing their AAA status, is perhaps less shocking for investors because they already thought things were very bad. Nevertheless, S&P does make a direct link between the outcome of the 9th of December EU summit in Brussels with whether or not it will actually go ahead with the threatened downgrades.

The mood music surrounding the summit has noticably eased pressure on the distressed European states as France and Germany have both committed to more centralised budget planning for the euro area nations, including automatic punishments for governments which break fiscal rules.

Investors are also still absorbing new austerity measures announced by Italy yesterday, in addition to a series of liquidity easing measures undertaken by international central banks last week.

In the actual market place, the interest rate on benchmark Italian 10 year bonds dropped today, hitting 5.87% at 5:22PM, a fall of eight basis points. Equivalent Spanish 10 year bonds were yielding 5.21%, a rise of 8.7bp. Both countries, however, are well below the 7% threshold which many analysts believe to be unsustainable for a prolonged period.

French 10 year bond yields rose during Tuesday, hitting 3.24%, a climb of 10.7bp. The yield on German bunds dropped 1.5bp to 2.19%.

US 10 year treasuries saw their yield climb 1.6bp to 2.06% while in London, the interest rate on 10 year gilts dropped 9.9bp to 2.25%.

BS

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