Euro zone bond yields held near record lows today as Standard & Poor's credit rating downgrade of Finland and its cut in France's outlook to negative added to concerns about a deteriorating global growth outlook.
The S&P moves came late on Friday at the end of a week heavy with poor economic data from across the euro zone and in which the International Monetary Fund revised its global growth forecasts lower for the third time this year.
Investors look at the worsening ratings as another argument for the European Central Bank to ease monetary policy further, potentially by buying large amounts of government bonds, pushing aside concerns over long-term creditworthiness. "It is important to some extent but I wouldn't put a lot of weight on the ratings," said Aliki Papasteriou, investment analyst at Nedgroup Investments. "If you see further deterioration you would expect some ECB action."
German 10-year Bund yields, the benchmark for euro zone borrowing costs, fell 1 basis point to 0.88 per cent, just above last week's record low of 0.859 per cent. Standard & Poor's rating for France remains at AA, but the outlook was revised on Friday to negative due to difficulties pushing through reforms and a porous budget.
On the same day, Finland - one of the last top-grade sovereigns in the euro zone - lost its triple-A rating from S&P. The rating agency cited risks of protracted economic stagnation because of an ageing population and shrinking workforce. Helsinki has taken an additional economic hit this year as sanctions that Moscow and the West imposed on each other over the Ukraine crisis have hurt trade with Russia, one of its main trading partners.
French and Finnish yields were little changed at 1.25 per cent and 1 per cent, respectively - also not far from their record lows.
Ireland’s benchmark 10-year bonds were also trading near a record low with a yield of 1.7 per cent .
"As long as markets are expecting the ECB to buy government bonds, rating downgrades, particularly from the best or second best (rated) euro zone members could not be ... (negative) for the bond market," said Marius Daheim, chief strategist at Bayerische Landesbank. Adding to hopes of looser monetary policy across the globe, Federal Reserve officials said on Saturday the slowdown in the global economy could delay an increase in US interest rates if serious enough. Portugal's ratings remained below investment grade, disappointing some in the market that had expected an upgrade.
Because of its junk rating, Portugal is treated by many investors as an emerging market rather than a euro zone member so its bond market sees days when it is decoupled from its fellow members of the currency union. Portuguese 10-year yields rose 9 basis points to 3.06 percent.
Italy kicked off a busy week in terms of debt sales in the euro zone with an auction of €6.75 billion of 2018, 2021 and 2044 bonds. Germany, France and Spain are also due to sell bonds this week.
