French Borrowing Costs Decline at First Debt Sale Since Losing AAA Rating
France sold 7.97 billion euros ($10.3 billion) of debt today with borrowing costs falling in its first sale of medium and long-term securities after it lost the top credit rating at Standard & Poor’s.
The sale included 2.961 billion euros of benchmark two-year notes, 1.575 billion euros of three-year securities and 3.43 billion euros of four-year debt. It had targeted a maximum of 8 billion euros in notes. The country later today will sell between 1 billion euros and 1.5 billion euros of inflation- linked bonds maturing between 2016 and 2040.
“The result is perfectly in line with the sentiment we’ve see over the past couple of weeks which has been relative constructive,” said Padhraic Garvey, head of developed markets debt at ING Bank NV in Amsterdam.
The Jan. 13 S&P downgrade to AA+ from AAA, which was flagged as a possibility by the New York-based rating company more than a month ago, didn’t affect a French bill sale this week or trigger a sell-off of existing bonds. The sale today represents a tougher test of investor appetite for French debt at a time when Europe’s second-largest economy may have entered a recession and the region’s debt crisis is far from over.
France’s benchmark 10-year bonds yielded 3.09 percent, down from 3.13 percent on Dec. 5, when S&P warned of a rating cut. Borrowing costs fell on Jan. 16 at the sale of 8.59 billion euros in bills, the first after the downgrade.
Spain today sold 6.61 billion euros of bonds maturing in 2016, 2019 and 2022, compared with a maximum target for the sale of 4.5 billion euros. The yield on the 2022 debt fell to 5.403 percent from 6.975 percent when the securities were auctioned in November and the 2019 yields also declined.
ECB Funding
The European Financial Stability Facility, the euro area bailout fund which also lost its AAA rating, sold 1.5 billion euros of six-month debt two days ago at its first sale at that maturity. Investors bid for 3.1 times the amount of bills sold.
Demand is being stoked in part by the European Central Bank, which has injected euros into the market by offering loans in so-called long-term refinancing operations, or LTROs. The ECB awarded 489 billion euros of three-year loans to 523 banks on Dec. 20, and banks in the region can use that cash to snap up government debt, investors said.
“The LTRO, as part of the ECB’s effort to provide liquidity to the market, continues to support short-dated paper,” Richard McGuire, senior fixed income strategist at Rabobank International in London, said before the auction results were released. “One might argue that the yields are too low compared with France’s fundamentals, but at the moment the liquidity seems to be the main driver of demand.”
High Quality
French national statistics office Insee judges that the French economy shrank last quarter and will do so again in the first three months of 2012, suggesting the nation is mired in recession for the second time in less than three years.
President Nicolas Sarkozy said yesterday that France has experienced a “major” drop in growth since the fourth quarter as the European sovereign debt crisis shook confidence.
Still, Sarkozy, who may be hit politically by the downgrade that came 100 days before French presidential elections as opponents challenge his crisis-management credentials, said again he’ll stay the course on cutting deficits and boosting French competitiveness.
France may also be benefiting from its status as the euro- area’s third-largest debt market at 1.3 trillion euros, and Sarkozy’s deficit-cutting measures.
“At the end of the day, French bonds are still regarded as high quality, and its market is liquid compared with smaller AAAs such as Finland or the Netherlands,” said Mohit Kumar, the London-based head of European fixed-income strategy at Deutsche Bank AG in London. “Is there an incentive to sell French bonds because of the downgrade? I would think not.”
To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Mark Deen in Paris at markdeen@bloomberg.net
To contact the editor responsible for this story: Vidya Root at vroot@bloomberg.net
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