French Yields Drop at First Bill Sale Since S&P Downgrade of Nation’s Debt

French borrowing costs fell at the country’s first bill sale after Standard & Poor’s stripped the nation of its top credit rating as investors shrugged off the downgrade.

France sold 1.895 billion euros ($2.4 billion) of one-year notes at a yield of 0.406 percent, down from 0.454 percent on Jan. 9. The Treasury sold a total of 8.59 billion euros in bills, including three and six-month paper. Yields fell on both.

More than two years into Europe’s sovereign debt crisis, and a month after S&P warned of a possible downgrade, investors had priced in the Jan. 13 rating cut to AA+ from AAA. France is also benefiting from its status as Europe’s second-largest economy with a liquid 1.3 trillion-euro debt market, as well as reforms being pushed by President Nicolas Sarkozy, said analysts including Peter Schaffrik, head of European interest-rate strategy at RBC Capital Markets in London.

“I’m not too bearish about France,” said Schaffrik. “Unless you are an investor with very strict rating guidelines, I don’t see the need to sell French bonds. There are still a lot of problems in the euro region, but we have seen some positive moves in the right direction from policy makers.”

JPMorgan Chase & Co research shows that 10-year yields for the nine sovereigns that lost their AAA status between 1998 and last year’s U.S. downgrade rose an average of two basis points the next week.

French bonds handed investors a 0.1 percent return so far this year, matching that from U.S. Treasuries, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

U.S. Case

Investors ignored S&P last August when it cut the U.S. to AA+, pushing the yield on the benchmark U.S. government bond to a record low of 1.6714 percent seven weeks later.

French 10-year yields fell three basis points to 3.03 percent at 4:29 p.m. London time. They climbed to a more than two-year high of 3.82 percent on Nov. 17 from 2.43 percent in August 2010, the least since Bloomberg began collecting the data in 1990.

France, unlike the U.S. or the U.K., cannot print its own currency to support the government in times of financial stress because it’s one of 17 nations that shares the euro as a currency. Ten-year bonds yields in both the U.S. and the U.K. are more than 1 percentage point below French levels at 1.86 percent and 1.97 percent respectively.

“The U.K. has currency risk and inflation risk, but not credit risk,” said Steven Major, global head of fixed-income research at HSBC Holdings Plc in London.

Debt Crisis

S&P said European governments’ failure to end the sovereign debt crisis that began in Greece in October 2009 was among the key reasons for its downgrade. Greek officials broke off talks with creditors on reducing the nation’s debt burden Jan. 14 and Pimco Chief Investment Officer Bill Gross said today that the country is on track for default.

The French downgrade “reflects our opinion of the impact of deepening political, financial, and monetary problems within the euro zone, with which France is closely integrated,” S&P said Jan. 14.

Still, investors had been anticipating the cut in France’s rating since the New York-based rating company said it was considering it on Dec. 5. The focus is now shifting to what Moody’s Investors Service and Fitch Ratings may do.

“You can strongly argue that the rating cut had been well- anticipated,” said Jamie Searle, an interest-rate strategist at Citigroup. “I would say that if we see a second rating agency following the S&P, then that could perhaps have a stronger impact on France.”

Moody’s

Moody’s said today that French government has “less room for maneuver” on its budget, adding that it’s still assessing its stable outlook on the country’s top rated debt.

Fitch Ratings analysts said last week that France is the most vulnerable of the top-rated euro area countries, though its deficit is lower than that of Britain and the U.S. meaning Fitch is unlikely to cut its rating this year.

“We’re unlikely to downgrade France in 2012 unless there is a serious intensification of the euro zone crisis,” David Riley, head of the sovereign-debt unit at Fitch Ratings, said Jan. 10 in London.

To contact the reporter on this story: Mark Deen in Paris at markdeen@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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