Investors Lap Up French Bonds, PIMCO Eschews Them, And Germany Stonewalls Debt-Reduction Pact For Greece

Wednesday, November 21, 2012 08:00
Investors Lap Up French Bonds, PIMCO Eschews Them, And Germany Stonewalls Debt-Reduction Pact For Greece

Tags: Economic Outlook | European crisis | European zone

If your clients are looking for a place to invest in European bonds, French bonds are certainly a popular choice. Despite the downgrade of French debt by Moody’s, investors are lapping up French bonds.

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French bonds pay higher yields than German bonds. And they are considered safer than the bonds of either Spain or Italy.
France’s government bond market is €1.9 trillion in size, diminishing doubts about the French economy or the policies of President François Hollande. Money managers have little faith in
Hollande’s policies and do not like France’s economic fundamentals.
They also can’t envision a sharp selloff in French debt. A recent auction of two-year and five-year bonds saw yields fall to a record low since the introduction of the euro.
Investors are paying premiums for the bonds. France benefits from a large investor base and its bonds are more liquid than German bonds.
The French economy has worsened since Hollande was elected, yet there is no sense of urgency to deal with the country’s problems.
France’s debt rose to 91% of gross domestic product in the second quarter, above the 90% threshold France’s finance ministers have said would threaten the country’s growth.
If France’s economy worsens and it receives further downgrades, investors could begin to look elsewhere.
Meanwhile, PIMCO has abandoned French and German debt in favor of higher yielding Spanish and Italian bonds, saying French bonds are too expensive and German bonds offer little return.
And European finance ministers have once again failed to come up with a debt-reduction package for Greece as Germany refused to agree to provide new funding needed to cover Greece’s two-year euro compliance extension.


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