* French bonds under modest pressure after downgrade
* Moody's strips France of triple-A rating, threatens more
* Bunds reverse early gains with focus on Greek aid
By Kirsten Donovan
LONDON, Nov 20 French government bond futures
fell and yields nudged higher on Tuesday after the euro zone's
second largest economy lost another of its prized triple-A
The one-notch downgrade of France by Moody's injected some
renewed caution into the market, helping to lift low-risk German
bonds in early trade, but moves were limited and the rise in
Bunds reversed as the downgrade had been widely expected.
Investors were also focused on a meeting of euro zone
finance ministers later in the day at which officials are
expected to agree to release 44 billion euros of emergency
funding for Greece, something that is also likely to reduce
safe-haven flows for the time being.
Moody's cut France by one notch to Aa1, leaving it with a
negative outlook and citing an uncertain fiscal outlook and a
The change brings the Moody's rating into line with that of
Standard & Poor's, which cut France to AA+ in January. Fitch
Ratings still assigns its highest AAA grade.
"Although it's not great, the market doesn't seem too
worried. It's only a modest positive for Bunds," a trader said.
"Away from that it's still pre-Eurogroup speculation, but
it's priced in that there's some sort of rubber-stamping of aid
French government bond futures were 18 ticks lower
at 136.33, with their German equivalents paring earlier
gains to stand 2 ticks higher on the day at 143.02.
French 10-year cash yields were 2 basis points
higher at 2.097 percent and Bund yields unchanged
at 1.36 percent.
Although the move in French bonds was relatively contained,
analysts and traders said they may come under further pressure
in the months ahead. Moody's said separately that it would
downgrade the country again if the Socialist government fails to
implement announced reforms.
"People seem to be reluctant to conduct the short-France
trade in 2012 with year-end coming, even though there seems to
be a feeling that that's the next big trade" said Rabobank rate
strategist Lyn Graham-Taylor, referring to bets that French
bonds would fall in price.
Although French bond yields have been reasonably steady and
are at historically low levels, helped by safe-haven flows
spurred by the euro zone debt crisis, the cost of insuring
against a default reflects growing investor caution.
Five-year credit default swaps on the country's debt
have risen around 30 basis points since late
Athens appears to be on track to receive long-delayed
funding under its latest international bailout after approving
laws on Monday to enforce budget targets and ensure
privatisation proceeds are used to pay off debt.
But while euro zone finance ministers are expected to give
tentative approval for the next tranche of loans to be released,
a deal on longer-term debt reduction may require further talks.
Euro zone officials have clashed with the International
Monetary Fund over how to ensure Greece's finances are
sustainable over the longer-term and whether to shift the
original target date for the country's debt to fall to 120
percent of output to 2022 from the original 2020.