The drop in French bonds today put only a small dent in the 9.4 percent rally since Standard & Poor’s stripped the country of its AAA status in January. The gains are more than double the rest of the global government bond market, according to Bank of America Merrill Lynch indexes, surpassing those of the U.S. and top-rated Germany, the U.K. and Australia.
The gains underscore how downgrades by credit-ratings companies, far from being a signal that prices will fall, may offer investors buying opportunities. The U.S. has been deemed more creditworthy by investors since S&P removed the nation’s AAA grade in 2011, with 10-year note yields dropping to a record this year. For France, Europe’s second-biggest economy, further declines in borrowing costs would provide a spur to Hollande’s socialist government as it struggles with a record trade deficit and an unemployment rate at the highest in 13 years.
“When ratings moves are announced there is often something of a headline shock but I don’t think the Moody’s downgrade is telling investors something they don’t already know,” said Mark Dowding, a senior fixed-income manager at BlueBay Asset Management in London, which oversees $47 billion. “I don’t think French bonds are going to be sold off considerably in the short term.”
The yield on France’s 10-year bonds rose eight basis points, or 0.08 percentage point, to 2.15 percent today, the biggest jump since Oct. 5. That compares with the record low of 2.002 percent on Aug. 3
Moody’s yesterday removed the country’s top rating, cutting the debt one level to Aa1 and maintaining its negative outlook. S&P lowered the rating by one level to AA+ from AAA on Jan. 13.
Since the January downgrade, global sovereign bonds have gained 4.1 percent through yesterday, according to the Bank of America indexes. German bonds advanced 3.4 percent in the period, while U.K. gilts rose 2.8 percent. Australian debt returned 6.7 percent, while U.S. Treasuries handed investors 2.5 percent, the indexes show.
Moody’s cited the worsening growth outlook for the French economy in its downgrade. The nation’s debt burden will peak at 91 percent of gross domestic product next year, the 2013 budget estimates.
“In some ways this was expected but it’s another sign that things continue to deteriorate in Europe,” said John Wraith, a fixed-income strategist at Bank of America Merrill Lynch in London. “The downgrade raises concerns about the structure of the euro zone and adds more of a burden on to the shoulders of German sovereign creditworthiness.”
Predicting the consequences of a rating change by S&P or Moody’s may be little better than flipping a coin, with yields moving in the opposite direction than suggested 47 percent of the time, according to data compiled by Bloomberg in June on 314 upgrades, downgrades and outlook changes going back to 1974. Yields were measured after a month relative to U.S. Treasury debt, the global benchmark.
“Any over-reaction and selloff today in France is perhaps a buying signal because historically you get downgraded, you don’t widen, you tighten,” Bill Blain, a strategist at Mint Partners in London, said today in an interview with Mark Barton on Bloomberg Television’s “Countdown.” “I don’t think there’s any reason to think that fundamentally France should be widening dramatically yet.”