Moody’s changed the outlooks on the Aaa credit ratings for Germany, the Netherlands and Luxembourg to negative yesterday, citing an “increasing likelihood” of collective support for countries such as Spain and Italy.
“If we are to see a credible resolution to the crisis it will inevitably mean a material increase in contingent liabilities for the core countries,” said Brian Barry, an analyst at Investec Bank Plc in London.
Hajime Nagata, who helps oversee the equivalent of $124 billion as a bond investor at Diam Co. in Tokyo, said he’s sticking with his bet on German bunds.
“I don’t care” about the outlook cut, he said. “If we move away from German bunds, where are we going to put the money? If we see a drop in German bunds, that’s a time to add.”
The German 10-year bund futures contract expiring in September fell as much as 0.7 percent to 144.51.
Bunds are “under pressure,” Richard Adcock, head of fixed-income technical strategy at UBS AG in London, wrote in a note to clients. After falling below a level of so-called support at 144.83, the contract may drop to as low as 143.76, he wrote, citing trading patterns. Support refers to an area where buy orders may be grouped.
Volatility on Dutch bonds was the highest in euro-area markets today followed by Belgium, according to measures of 10- year debt, the spread between two- and 10-year securities and credit-default swaps.
A composite index based on a survey of purchasing managers in both industries in the 17-nation euro area was unchanged at 46.4, the same level as in June, London-based Markit Economics said. A reading less than 50 indicates contraction.
Italy’s 10-year bonds dropped, pushing the yield as much as 24 basis points higher to 6.58 percent, and the nation’s nine- year rate climbed above that on similar-maturity Irish debt today. The yield premium investors demand to hold the Irish bonds reached as much as 993 basis points in July 2011, according to generic yield data compiled by Bloomberg. Ireland doesn’t currently have a 10-year benchmark.
Italy’s two-year note yield climbed to more than 5 percent for the first time since January.
Credit-default swaps on Spain rose 12.5 basis points to a record 644, according to data compiled by Bloomberg.
The risk of Spanish bonds being cut to non-investment grade status “remains high,” according to Royal Bank of Scotland Group Plc. Moody’s rates Spain Baa3, one step above junk. Standard & Poor’s has a negative outlook on Spain’s BBB+ rating, which is three levels above junk, and Fitch Ratings ranks the nation at BBB, two steps above non-investment grade.
“It is hard to envisage Spain eventually escaping a full bailout,” Brian Mangwiro and Giles Gale, strategists at RBS in London, wrote in a research report today. They said investors should sell the debt of so-called periphery nations’ such as Spain, and buy higher-rated “core fixed-income risk.”
German debt returned 4.5 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities lost 9 percent, while Italy’s rose 5.6 percent.