Downgrades dismissed by bullish buyers

Tim Wallace
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HEALTHY European bond auctions and strong German confidence figures pushed buoyant markets upwards yesterday as traders shrugged off a series of downgrades.

Stocks and the euro shot up on the unexpectedly good figures, countering the negative sentiment led by Friday’s downgrades of eight European sovereigns’ debt by Standard & Poor’s.

Despite losing its triple-A rating on long-term debt on Monday, the European Financial Stability Facility (EFSF) retained its top short-term rating and successfully issued six-month bills yesterday.

The yield came in at 0.2664 per cent on €1.501bn (£1.25bn) of bills sold. This was the EFSF’s first issuance of this maturity.

Spain’s government – which was downgraded to A from AA- on Friday – also successfully tapped the markets.

It issued €3.01bn of 12-month debt at 2.05 per cent – a sharp drop from the 4.05 per cent seen in December – and €1.87bn in 18-month debt at 2.39 per cent, again down from 4.23 per cent previously.

The ZEW index of investor confidence jumped from minus 53.8 in December to minus 21.6 in January.

The German indicator remains consistent with a fall in GDP, but is far less severe than economists expected and may show the worst of the downturn could be over.

Yields on high-risk countries’ bonds fell on the wave of optimism.

Italy’s ten-year bond yields fell 11.9 basis points over the day to 6.503 per cent and Portugal’s slid 27.3 basis points to 14.136 per cent. Meanwhile Spain’s edged down five basis points to 5.134 per cent.

The euro rose 0.49 per cent against the US dollar and 0.71 per cent against the yen.