Spanish, Portuguese Bonds Drop After Moody’s Cuts Europe Ratings

Spanish and Portuguese bonds fell, increasing the extra yield investors demand to hold the securities over German bunds, after Moody’s Investors Service cut the ratings of six European countries.

German bunds outperformed most of their euro-region peers after the rating company said it had downgraded Italy, Spain, Portugal, Slovakia, Slovenia and Malta, boosting demand for safer assets. Economists say a report today will show German investor confidence rose in February. Spain sold bills today, while Italy is scheduled to auction notes. Euro-area finance chiefs will meet in Brussels tomorrow to decide on a second financial aid package for Greece.

We’re seeing “some spread widening because of the latest bad news on the Moody’s rating downgrades,” said Christian Reicherter, an analyst at DZ Bank AG in Frankfurt. “That trend should last over the whole day and then the main event is tomorrow. Everybody is waiting for the EU finance ministers’ meeting in Brussels and news on Greece.”

Spain’s 10-year yield climbed three basis points, or 0.03 percentage point, to 5.29 percent at 9:55 a.m. London time. The 5.85 percent bond due in January 2022 fell 0.2, or 2 euros per 1,000-euro ($1,317) face amount, to 104.26.

The extra yield investors demand to hold the Spanish securities over 10-year bunds increased three basis points to 336 basis points.

The German 10-year yield was little changed at 1.93 percent after dropping to 1.89 percent, the lowest since Feb. 7.

Moody’s Downgrades

Spain was downgraded to A3 from A1 late yesterday, Italy to A3 from A2 and Portugal to Ba3 from Ba2, all with negative outlooks. Moody’s also lowered the ratings of Slovakia, Slovenia and Malta.

Portugal’s 10-year yield increased five basis points to 11.97 percent, widening the spread over bunds by five basis points to 10.05 percentage points. Italy’s 10-year yield rose one basis point to 5.61 percent

“Policy makers have made steps forward but we do not think they have done enough to reassure the market that we are on a stable path,” said Alistair Wilson, chief credit officer for Europe at Moody’s in London.

French bonds fell after Moody’s also said it may strip France and the U.K. of their top Aaa ratings. The French 10-year yield climbed three basis points to 2.94 percent.

The ZEW Center for European Economic Research’s index of investor and analyst expectations for Germany rose to minus 11.8 from minus 21.6 in January, its third monthly increase, according to a Bloomberg survey before today’s report.

Spain sold a combined 5.45 billion euros of bills, the central bank said, compared with a maximum target of 5.5 billion euros set for the sale. Demand for the 364-day debt was 2.27 the amount sold, compared with 3.54 last time the securities were sold in January. The bid-to-cover ratio for the 553-day bills was 2.88, versus 3.23 times last month.

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