French, German Bonds Fall as S&P Puts 15 Nations on Review for Downgrade

By Emma Charlton and Paul Dobson - Dec 6, 2011 4:15 PM GMT+0700

French and German bonds dropped, leading declines among the euro-area’s government securities, after Standard & Poor’s said it may lower credit ratings across the region.

Belgian and Austrian 10-year bonds fell after S&P said yesterday 15 euro nations may have their rankings lowered as “continuing disagreements” among policy makers on how to tackle the debt crisis risks damaging their financial stability. Ten-year bunds declined for a second day as Germany and France strengthened their push for tighter euro-area economic cooperation yesterday before a European summit on Dec. 8-9.

“It’s a dramatic move,” said Padhraic Garvey, head of developed-market debt strategy at ING Groep NV in Amsterdam. “It makes it very difficult for a recovery of investor sentiment and it piles further pressure on legislators, which may be a good thing in the end. In order to reverse this, we need an incredibly positive outcome from the summit.”

French 10-year yields climbed 12 basis points, or 0.12 percentage point, to 3.25 percent at 9:13 am in London. The 3.25 percent bond due in October 2021 declined 0.99, or 9.90 euros per 1,000 euro ($1,338) face amount to 99.985. Ten-year German bund yields increased five basis points to 2.26 percent.

Ratings may be cut by one level for Austria, Belgium, Finland, Germany, Netherlands and Luxembourg, according to S&P. The company said it may lower the ratings of Estonia, France, Ireland, Italy, Malta, Portugal, Slovakia, Slovenia and Spain by up to two notches.

Belgium, Austria

Belgian 10-year yields advanced eight basis points to 4.41 percent, and rates on similar-maturity Austrian bonds climbed six basis points to 3.22 percent. Spain’s 10-year rates advanced one basis point to 5.13 percent.

Bunds fell yesterday as optimism Europe’s leaders are moving closer to agreeing on a plan to contain the debt crisis reduced demand for the safest assets. Government bonds from Italy and Spain rallied yesterday as German Chancellor Angela Merkel and French President Nicolas Sarkozy pushed for a rewrite of the European Union’s governing treaties to tighten economic cooperation as a first step toward ending the debt crisis.

The governments of France and Germany said in a statement they “recognize” the move by S&P and “affirm their conviction” that the common proposals made yesterday will strengthen coordination of budget and economic policy, and promote stability, competitiveness and growth.

Bailout Fund

Downgrades of Germany and France would affect the rating of the European Financial Stability Facility, the bailout fund for struggling euro member countries that has funded rescue packages for Greece, Ireland and Portugal partially through bond sales. If the EFSF has to pay higher interest on its bonds, it may not be able to provide as much funding for indebted nations.

Yields on EFSF 3.375 percent bonds due in July 2021 were little changed at 3.63 percent, Bloomberg data showed.

With the summit in Brussels looming, U.S. Treasury Secretary Timothy Geithner arrives in Frankfurt today to talk with political leaders and the European Central Bank, which holds a policy meeting Dec. 8.

The ECB will lower its benchmark rate by a quarter point to 1 percent, according to 53 of 58 economists in a Bloomberg News survey. Two said the central bank will cut rates to 0.75 percent, and three estimate it will leave them at 1.25 percent.

German bonds have handed investors a return of 7.2 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. French bonds have gained 3.5 percent, Italian bonds have declined 4.9 percent and Spanish bonds have advanced 6.1 percent.

To contact the reporters on this story: Emma Charlton in London at echarlton1@bloomberg.net; Paul Dobson in London at pdobson2@bloomberg.net.

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net