French two-year notes gained as the nation prepares to auction as much as 8.7 billion euros ($11 billion) of bills. France joined Austria in being stripped of its top rating by S&P after government bond markets closed last week, leaving Germany with the euro region’s only stable AAA grade. Portugal’s credit rating was cut two levels to BB with a negative outlook. Citigroup Inc. said Portugal will be removed from the bank’s European Government Bond Index.
The declines are “a function of Portugal’s absolute rating now which sees it dropping out of various indices,” said Eric Wand, a fixed income strategist at Lloyds Bank Corporate Markets in London. “The situation has brought home that politicians need to get their act together. By keeping a whole swathe of nations on negative outlook, this keeps the pressure on the ECB to keep buying.”
Portugal’s 10-year yield advanced 101 basis points, or 1.01 percentage point, to 13.47 percent at 910:23 a.m. London time, its biggest intraday surge since July 4. The 3.85 percent security due April 2021 fell 3.435, or 34.35 euros per 1,000- euro face amount, to 50.78.
That increased the yield difference, or spread, between the securities and similar-maturity German bunds by 1 percentage point to 11.69 percentage points.
ECB Bond Purchases
Volatility on Portuguese sovereign debt was the highest in euro-area markets today, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps. The move in the 10-year yield was 8.7 times the 90-day average.
Italian 10-year yields were nine basis points higher at 6.73 percent after climbing as much as 22 basis points. Spain’s benchmark 10-year yield added three basis points to 5.25 percent.
Italian and Spanish bonds pared declined after the ECB was said to buy the securities, according to four people with knowledge of the transactions, who declined to be identified because the deals are confidential.
France and Austria were cut one level to AA+ from AAA and face the risk of further reductions, S&P said on Jan. 13. While Finland, the Netherlands and Luxembourg kept their AAA ratings, they were put on negative outlook. Spain and Italy were also among the nine nations downgraded.
‘In The Price’
“So much as S&Ps previous warning was already in the price, the fact that France escaped a two-notch downgrade stands to limit any possible underperformance,” Richard McGuire, a senior fixed-income strategist at Rabobank International in London, wrote in an e-mailed note.
French 10-year yields were little changed at 3.08 percent and the yield on 10-year Austrian notes was also little changed, at 3.07 percent.
Benchmark Greek bonds maturing in October 2022 advanced for a fifth day as the nation’s government and its creditors prepare to return to the negotiating table this week in an attempt to revive stalled talks on a debt swap.
European officials and the nation’s creditors agreed in October to implement a 50 percent cut in the face value of Greek debt by voluntarily exchanging outstanding bonds for new securities, with a goal of reducing Greece’s borrowings to 120 percent of gross domestic product by 2020.
The two sides, which broke off negotiations on Jan. 13, have struggled to reach an accord on the coupon and maturity of the new bonds to determine losses for investors, raising the danger of a sovereign default. The yield on the 5.9 percent security dropped 36 basis points to 34.01 percent. The price rose to 20.74 percent of face value.
Bunds have handed investors a return of 0.4 percent this year, after gaining 9.7 percent in 2011, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. French and Greek bonds have both advanced 0.1 percent and Portuguese debt has gained 5.2 percent, the indexes show.
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