Italian and Spanish bonds dropped following a rally yesterday when the European Central Bank unexpectedly cut its key interest rate to counter a risk of deflation. S&P downgraded France’s rating to AA from AA+ with a stable outlook saying the government’s reform of tax, labor markets, products and services won’t raise medium-term growth prospects. A report today showed French industrial production fell in September. Benchmark German bunds were little changed.
“French yields rose slightly after the downgrade but we expect any increase to be limited as the move has been largely expected,” said Ciaran O’Hagan, head of European interest-rate strategy at Societe Generale SA in Paris. “The news may have provided some impetus for the market to take profits on Italian and Spanish bonds after a big rally yesterday. But in the bigger scheme of things, the impact will probably be limited.”
The yield on France’s 2.25 percent bond due in May 2024 increased two basis points, or 0.02 percentage point, to 2.39 percent as of 9:08 a.m. London time. The price dropped 0.154, or 1.54 euros per 1,000-euro ($1,342) face amount, to 98.73.
The French government bond market is the second biggest in the euro area, trailing only Italy, and is the fourth largest among global sovereign-debt markets, according to data compiled by Bloomberg.
Italian 10-year yields climbed four basis points to 4.13 percent after falling to 4.04 percent yesterday, the lowest since May 28. The rate on similar-maturity Spanish bonds increased three basis points to 4.08 percent. The yield dropped 10 basis points yesterday, the biggest decline since Oct. 1.
Since S&P’s first downgrade on Jan. 13, 2012, French government bonds returned more than 10 percent, according to Bloomberg France Sovereign Bond Index. (BFRA)
The Frankfurt-based ECB, led by President Mario Draghi, reduced its main refinancing rate by 25 basis points to a record-low 0.25 percent yesterday. The decision was predicted by three of 70 economists in a Bloomberg News survey. Officials kept the deposit rate at zero and lowered the marginal lending rate to 0.75 percent from 1 percent.
Germany’s 10-year bund yielded 1.69 percent after sliding to 1.65 percent on Oct. 31, the lowest since Aug. 8.
The yield difference, or spread, between French bonds maturing in May 2023 and German securities due in August 2023 widened by two basis points to 49 basis points. The average spread over the past five years, based on their generic yields, is 69 basis points.
French securities gained 0.3 percent this year through yesterday, according to Bloomberg World Bond Indexes. Spain’s returned 11 percent, Italy’s earned 7 percent, while German bonds lost 1 percent.