Fitch Sees Breakdown Between Euro-Area Bond Market, Its Ratings

Bond investors are more optimistic about the euro-area’s peripheral nations than the rating companies, according to Fitch Ratings, as unprecedented stimulus from the central bank boosts demand for government debt.

The rally in sovereign bonds that has driven yields across the euro region to record lows shows a breakdown in any correlation between ratings and the market, Michele Napolitano, a director at Fitch said. The company, which has raised the credit score of four euro-area nations since the start of 2014, still rates Cyprus, Greece and Portugal below investment grade.

“The market is more positive than us on Portugal, Spain and Italy,” Napolitano said at a conference in London today. Fitch won’t raise credit ratings until improvements in the nation’s fiscal situations start feeding through to their economies, he said.

Yields from Austria to Spain have dropped this year as European Central Bank President Mario Draghi cut interest rates twice and pledged a program of asset-backed securities purchases to counter slowing inflation. The average yield to maturity on euro-area government debt dropped to 1.012 percent on Sept. 5, the lowest since at least 1994, according to Bank of America Merrill Lynch indexes.

Subdued inflation in the currency bloc is going to be problematic for companies and governments that are highly indebted, said Enam Ahmed, a director at Fitch. Consumer prices in the euro area rose 0.3 percent in August, the lowest annualized rate since October 2009, according to an estimate published on Aug. 29. That compares with the ECB’s inflation target of just under 2 percent.

“Even persistent low inflation has an impact,” Ahmed said. “We don’t have to wait for deflation for it to have a rating impact.”

Investors have largely shrugged off ratings companies’ opinions, reflecting a shift to a focus on in-house analysis. Since France first lost its AAA rating with Standard & Poor’s on Jan. 13, 2012, the yield on the nation’s benchmark 10-year government bond has dropped to a record-low 1.217 percent last month, from 3.04 percent.

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