French Bonds, Euro Fall on Ratings Concern

By Stephen Kirkland and Lynn Thomasson - Dec 6, 2011 8:26 PM GMT+0700

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Dec. 6 (Bloomberg) -- Peter Chatwell, fixed-income strategist at Credit Agricole CIB, discusses the outlook for bonds ahead of the Dec. 9 European leaders' summit. He also discusses Standard & Poor's credit rating warning on the region with Mark Barton on Bloomberg Television's "On the Move." (Source: Bloomberg)

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Dec. 6 (Bloomberg) -- Jonathan Garner, the chief Asia and emerging-market strategist at Morgan Stanley in Hong Kong, talks about the region's stock markets. Garner also discusses Europe's sovereign debt crisis. He speaks with John Dawson on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)

French and German bonds fell after Standard & Poor’s said it may cut the credit ratings of 15 euro nations. Stocks pared losses and U.S. futures rose on speculation the European Central Bank will take more steps to contain the debt crisis.

The yield on France’s 10-year bond jumped 12 basis points at 8:25 a.m. in New York, with the similar maturity German bund yield climbing two basis points. The Stoxx Europe 600 Index lost 0.2 percent and S&P 500 Index futures added 0.2 percent. The euro weakened less than 0.1 percent to $1.3389, trimming earlier declines, after a report showed German factory orders surged the most in 19 months in October. The Swiss franc slid against all 16 major currencies. Nickel and copper led commodities lower.

Germany, France and four other nations may lose their AAA credit ratings depending on the result of a summit of European Union leaders on Dec. 9, S&P said yesterday. ECB President Mario Draghi will probably cut the benchmark interest rate a quarter point to buoy the economy when policy makers meet Dec. 8, according to 58 economists in a Bloomberg survey.

“The rating action may force the ECB to be more aggressive in inking up the presses if they want to avert a crisis,” Jim Reid, a strategist at Deutsche Bank AG in London, wrote in a research note. “2012 is looking to us like a year that will be decided by whether the ECB is a very different institution to what it is today.”

The extra yield, or spread, investors demand to hold the French securities instead of bunds, Europe’s benchmark government securities, increased 11 basis points. Yields on Dutch, Finnish, Austrian and Belgian securities increased. The Portuguese-German spread narrowed 14 basis points, while the yield on Ireland’s October 2020 security fell six basis points.

Bond Risk

The cost of insuring against default on European sovereign debt rose for the first time in seven days, with the Markit iTraxx SovX Western Europe Index of credit-default swaps on 15 governments climbing seven basis points to 325.

The Swiss franc declined 0.4 percent against the euro and slid 0.5 percent versus the dollar after a report showed that consumer prices in the nation fell the most in more than two years last month, led by lower costs for imports, adding pressure on the Swiss National Bank to raise its franc ceiling to protect the economy.

Lower Rates

Australia’s dollar dropped 0.4 percent against the U.S. currency after the nation’s central bank reduced its benchmark interest rate for a second straight month as Europe’s debt crisis threatens to slow exports.

The Stoxx 600 earlier dropped of as much as 0.8 percent. RWE AG, Germany’s second-largest utility, tumbled 8.1 percent after announcing a share sale to raise about 2.1 billion euros ($2.8 billion). Yara International ASA gained 9.4 percent as the maker of nitrogen fertilizer affirmed its policy of returning cash to shareholders.

S&P 500 futures expiring in December erased an earlier decline of 0.8 percent. The benchmark equity gauge climbed 1 percent yesterday. The yield on the 10-year Treasury note rose two basis points to 2.07 percent.

Nickel dropped 1.8 percent, copper declined 1.5 percent and lead dropped 1.5 percent.

The MSCI Emerging Markets Index (MXEF) fell 1.3 percent, snapping a six-day, 10 percent rally. The Hong Kong Shanghai China Enterprises Index (HSCEI) slid 1.5 percent after Fitch Ratings said a Chinese property-price correction will lead to worsening loan portfolios while Nomura Holdings Inc. cut its estimate for China’s economic growth next year to 7.9 percent from 8.6 percent. Russia’s Micex Index and Taiwan’s Taiex Index (TWSE) slid at least 2 percent.

To contact the reporters on this story: Stephen Kirkland in London at skirkland@bloomberg.net; Lynn Thomasson in Hong Kong at lthomasson@bloomberg.net

To contact the editor responsible for this story: Stuart Wallace at swallace6@bloomberg.net