It appears as thought investors have started place relatively little stock in the credit ratings of Standard & Poor's. S&P downgraded the rating it placed on French, Austrian, and Italian debt among other countries on Friday, but Monday's first bill sale for France saw the cost of borrowing money slip lower.
Yields Slip Despite Downgrade
The French government auctioned off $2.4 billion of one-year Treasury bills at a yield of 0.406, 48 basis points lower than the yield on one-year notes at a January 9th sale. In total, France auctioned off $10.9 billion in one-year, three-month, and six-month notes, and saw yields fall on all three. This offers further evidence that the announced debt downgrade had already been priced into the market months ago. S&P had announced in December that it was reviewing most of the eurozone's credit ratings, and it seems clear that the S&P's opinion held little sway with bond speculators today.
“I’m not too bearish about France,” said Peter Schaffrik, head of European interest-rate strategy at RBC Capital Markets in London. “Unless you are an investor with very strict rating guidelines, I don’t see the need to sell French bonds. There are still a lot of problems in the euro region, but we have seen some positive moves in the right direction from policy makers.”
Credit Ratings Holding Little Sway
France isn't the only country to see borrowing costs fall despite the opinion of Standard & Poors. When the debate over the debt ceiling led to S&P downgrading American debt in early August of last year, it sent equities markets into a tailspin. However, yields on American Treasury notes fell. Seven weeks after the downgrade, yields on benchmark U.S. Government bonds fell to a record low of 1.6714 percent. French 10-year notes also traded slightly lower today, falling another three basis points to 3.03 percent.
It seems possible that investors have opted to give less credence to rating agencies in the aftermath of their disastrously inaccurate ratings that contributed to the housing meltdown. However, there are several other factors in play. The fact that the move was widely anticipated probably contributed to its lack of impact.
“You can strongly argue that the rating cut had been well- anticipated,” said Jamie Searle, an interest-rate strategist at Citigroup (C). “I would say that if we see a second rating agency following the S&P, then that could perhaps have a stronger impact on France.”
Another factor contributing to falling yields across Europe is most likely the lending program being pursued by the European Central Bank, ECB. The program offers unlimited three-year loans to private banks at a low rate of just 1 percent. The move was intended to inject liquidity into the banking system and lower bond yields without warranting a bong-buying program by the central bank. The move appears to be working as banks have snapped up the loans and appear to be taking the opportunity for quick profits on short term notes across Europe.
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