French bonds advanced as borrowing costs fell at the nation’s first debt sale since Standard & Poor’s stripped it of its top credit rating and cut the grades of eight other euro-area countries.
Portuguese bond yields reached a record after they were downgraded by S&P to the second-highest non-investment grade, with a negative outlook, and Citigroup Inc. said the nation’s debt will be removed from its European Government Bond Index. France sold 1.895 billion euros ($2.41 billion) of one-year bills at a yield of 0.406 percent, down from 0.454 percent on Jan. 9. Greek bonds climbed for a fifth day before a resumption of negotiations this week on a plan to reduce the nation’s debt.
“The bill auctions have been carried out without a problem, which is helpful for market sentiment toward the euro area,” said Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “The reaction to the S&P downgrade has been somewhat muted. The move wasn’t a surprise and was well-flagged for a number of the issuers.”
French 10-year bond yields slid four basis points, or 0.04 percentage point, to 3.04 percent at 4:12 p.m. London time. The 3.25 percent security due October 2021 rose 0.325, or 3.25 euros per 1,000-euro face amount, to 101.775. France’s two-year note yield was five basis points lower at 0.66 percent.
France joined Austria in losing its top credit rating after government-bond markets closed on Jan. 13, leaving Germany holding the euro region’s only stable AAA grade with S&P. The nations were cut one level to AA+ from AAA and face the risk of further reductions, the rating company said. While Finland, the Netherlands and Luxembourg kept their AAA ratings, they were put on negative outlook. Spain and Italy were also among the nations downgraded and Portugal was cut two steps to BB.
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 17.3 times the 90-day average.
The bond’s decline pushed the rate as much as 203 basis points higher to 14.48 percent, the most since Bloomberg began collecting the data in 1997. The price fell to 48.69 percent of face value. Two-year note yields climbed 311 basis points to 15.78 percent.
The drop is “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. “By keeping a whole swathe of nations on negative outlook, this keeps the pressure on the ECB to keep buying.”
ECB Bond Purchases
German five-year note yields were little changed at 0.75 percent after matching a record low 0.733 percent. Ten-year bunds, Europe’s benchmark security, yielded 1.77 percent.
Italian and Spanish bonds rose after the ECB was said by four people with knowledge of the transactions to have bought the securities. The people declined to be identified because the deals are confidential.
The ECB increased its government bond purchases last week, settling 3.77 billion euros of acquisitions in the week through Jan. 13, up from 1.1 billion euros the previous week.
Italian 10-year yields were three basis points lower at 6.62 percent after climbing as much as 22 basis points. Spain’s benchmark 10-year yield fell four basis points to 5.19 percent.
Greek bonds maturing in October 2022 advanced as the nation’s government and its creditors said they would return to the negotiating table this week in an attempt to revive stalled talks on a debt swap.
European officials and bondholders 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 the country’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 26 basis points to 34.11 percent. The price rose to 20.665 percent of face value.
Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said Greece is heading for default.
Dutch 10-year yields dropped to a record low 2.019 percent after the Netherlands sold 2.19 billion euros of 100-day bills at a yield of 0.011 percent. The nation also sold 1.02 billion euros of bills due in June at a yield of 0.013 percent.
The auction saw “a very solid result suggesting that the market was encouraged by S&P’s decision to keep its Dutch rating as AAA despite assigning it a negative outlook,” Sercan Eraslan, a fixed-income strategist at WestLB AG in Dusseldorf, wrote in an e-mailed note.
Finland’s 10-year yields fell to a euro-era record of 2.10 percent. Belgian bonds also rose as S&P left the nation’s AA rating unchanged and took it off negative watch. The country plans to sell 10-year bonds through banks in “the near future,” its finance ministry said today. The 10-year yield slipped seven basis points to 4.09 percent.
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.
The leaders of Italy, France and Germany will probably delay planned talks on the euro-area debt crisis until after the next European Union summit on Jan. 30, an Italian government official said.
Italian Prime Minister Mario Monti, German Chancellor Angela Merkel and French President Nicolas Sarkozy were due to meet in Rome on Jan. 20. The meeting was canceled at Sarkozy’s request because of a scheduling conflict, the official, who spoke on condition of anonymity because the governments haven’t announced the change yet, said today.