Bonds: Calm as yields edge downwards, although off lows of the day

Date: Friday 16 Dec 2011

These were the movements on 10 year bond yields amongst some of the most watched nations:

Italy: +2.1bp 6.592%
Spain: -12.8bp 5.305%
France: -2.8bp 3.057%
Germany -9.3bp 1.85%
UK -5.9bp 2.04%
U.S. -7.4bp 1.84%

The general perception of risk appeared to be heading downward for the most distressed countries during much of the session, despite the speculation at the start of the day concerning the risk of an imminent ratings downgrade on Italy and Spain by Standard&Poor's.

Thus, an early fall in Italy’s yields, possibly on the back of a successful vote of confidence on the new Prime Minister, Mario Monti, was reversed by news out later in the day.

A possible catalyst for that reversal may have been remarks out from US officials, who are reported to have said that the country will not ask for an increase in IMF quotas.

Later on in the day, sure enough, a ratings agency did take action on the ratings of several periphery nations, but in the event it was Fitch and not S&P.

Fitch has placed the ratings of Belgium, Spain, Slovenia, Italy, Ireland and Cyprus all on ratings watch negative.

As the agency explains, being placed on ratings watch negative means that, “the ratings are under active review and are subject to a heightened probability of downgrade in the near-term.”

The reason behind this decision has been that, in Fitch's opinion, “following the EU Summit on 9-10 December, Fitch has concluded that a 'comprehensive solution' to the Eurozone crisis is technically and politically beyond reach. (…) Of particular concern is the absence of a credible financial backstop. In Fitch's opinion this requires a more active and explicit commitment from the ECB to mitigate the risk of self-fulfilling liquidity crises for potentially illiquid but solvent Euro Area Member States.”

French Finance Minister, Francois Baroin, today declared that it's economically "better to be French than British".

The comments follow a comparison of the fundamentals of the UK and France’s economy by the head of the Banque de France, Christian Noyer. France is facing a possible credit rating downgrade and has suggested the move may be “politically motivated”

Rumours persist that several other Eurozone countries could also see their ratings cut, including Germany.

BS

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