French Negative Yields Show ECB Asserting Supremacy Over Ratings

Updated on
  • Austria, Finland, Italy and Portugal face rating reviews
  • Sovereign ratings not `high on the agenda': Rabobank

With countries from Austria to Portugal facing updates on their credit ratings Friday, France has demonstrated this week that, for investors, central banks matter a whole lot more.

Just two trading days after Moody’s Investors Service cut the nation’s rating, gains by French government bonds pushed two-year yields further below zero to the lowest level in five weeks. Fueling the rally: the possibility of further stimulus from the European Central Bank to counter the risk of deflation.

Euro-area sovereign securities eked out gains in the past month while their U.S. counterparts lost money, as ECB officials reaffirmed their commitment to supporting the recovery, and pumped 60 billion euros ($67 billion) a month into the economy via its quantitative easing.

“Ratings are not a topic that’s very high on the agenda,” said Elwin de Groot, a senior market economist at Rabobank International in Utrecht, Netherlands. “The market is much more driven by the macro themes, whether it be weakness in emerging markets and of course the possibility that the ECB will do more QE. That’s supporting bonds in general.”

Attempts by ECB policy makers including President Mario Draghi to downplay an immediate need to reinforce the central bank’s bond-buying program did little to quench investors’ appetite for sovereign securities.

French 10-year bond yields reached a one-month low on Sept. 23, the day that Draghi said it was too soon to say whether risks to the economic outlook warranted more easing, and Governing Council member Ewald Nowotny said he was wary of adding to stimulus any time soon.

Bond Returns

Sovereign bonds in the 19-nation euro area earned investors an average 0.3 percent in the past month through Thursday, compared with a loss of 0.5 percent on Treasuries and a 0.2 percent gain for holders of U.K. gilts. The average yield across the euro region has fallen to 0.78 percent, having been above 1 percent as recently as July 10, according to Bank of America Merrill Lynch indexes. It dropped to a record 0.4252 percent in March as the ECB prepared to start its government-bond purchases.

Finland and Italy are also among those nations facing ratings updates on Friday.

France’s experience has demonstrated how ratings have lost their potency since the height of the sovereign-debt crisis. French 10-year yields have dropped from about 3 percent when the country first lost its AAA rating with Standard & Poor’s in January 2012. The yield tumbled along with its peers amid various ECB stimulus measures, reaching a record-low 0.33 percent in April. Moody’s lowered the nation’s rating by one step to Aa2 on Sept. 18.

Michiel de Bruin, London-based head of global rates and money markets at BMO Global Asset Management, which oversees about $244 billion, said he favors Italian, Spanish and Portuguese bonds as ECB purchases lend support.

“We’re still constructive on European government bonds compared with the U.S. and the U.K. because there is clearly, and it’s expected to continue, a divergence of monetary policy,” he said.

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