November 20, 2012 / 12:35 PM / 5 years ago

EURO GOVT-French yields rise after Moody's strips AAA-rating

4 Min Read

* 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 (Reuters) - French government bond yields rose and futures fell on Tuesday after the euro zone's second largest economy lost another of its prized triple-A credit ratings.

The one-notch downgrade of France by Moody's gave low-risk German bonds an early lift, but the move quickly reversed as investors focused on a meeting of euro zone finance ministers later in the day.

The ministers are expected to agree to release 44 billion euros of emergency funding for Greece and this prospect reduced the demand for safe-haven assets.

In a widely expected move, Moody's cut France's rating to Aa1, citing an uncertain fiscal outlook and a deteriorating economy, and warned fresh downgrades could follow.

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 triple-A grade.

French government bond futures were 48 ticks lower at 136.03 and 10-year cash yields 4.7 basis points higher at 2.12 percent.

One trader saw limited lasting impact.

"We don't believe the Asian central banks that have been a big driver of the convergence (with German bonds) will let up on their buying," he said.

However, analysts and traders said French debt may come under further pressure in the months ahead. Moody's said separately that it would downgrade France 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 trades involving selling French paper and betting market prices will fall.

Despite new European Union rules designed to make it harder to take speculative positions, market players can still make short bets by borrowing, or agreeing to borrow, a bond then selling it in hope of buying it back at a lower price.

Although French 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 France's debt were 2 bps higher at 91 bps, according to monitor Markit, and up around 30 bps since late November.

Greece Waits

While finance ministers are expected to give tentative approval for the next tranche of loans for Greece, a deal on longer-term debt reduction may require further talks.

"It's priced in that there's some sort of rubber-stamping of aid for Greece," a second trader said.

Euro zone officials have clashed with the International Monetary Fund over how to ensure Greece's finances are sustainable and whether to shift the target date for its debt to fall to 120 percent of output to 2022 from 2020.

As Greece waited, Portuguese 10-year bond yields fell sharply -- down 33 bps to 8.21 percent, their lowest since late October -- after its international lenders said on Monday the country had passed the sixth quarterly review under its bailout programme.

German Bund futures were 35 ticks lower at 142.65, having broken below last week's low of 142.83.

"There's been a few stops triggered below 143.00 and it looks likely Greece will get the next piece of aid, even if it is just kicking the can down the road," a third trader said, adding a test of 142.50 was possible.

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