* 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 yields
rose and futures fell on Tuesday after the euro zone's second
largest economy lost another of its prized triple-A credit
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.
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.