Tags: AAA | Nations | Crisis | Volatility

AAA-Rated Nations Held Hostage by Crisis Volatility

Tuesday, 06 December 2011 07:20 AM

Bonds from AAA rated Austria, the Netherlands and Finland are suffering as Europe’s debt crisis increases volatility and erodes their haven status.

Sixty-day volatility on 10-year government debt from the three nations reached euro-era records in November, as investors increased bets the currency bloc may unravel and as yields on Italian and Spanish securities surged. The countries were among 15 put on watch for a downgrade by Standard & Poor’s yesterday. Europe’s leaders will try again to fashion a solution to the turmoil this week after the failure of their fourth rescue blueprint sparked concern that the crisis will infect all 17 euro nations.

“Volatility clearly has increased and it makes life a lot tougher for investors,” said Alex Johnson, who helps oversee $47 billion as London-based head of portfolio management at Fischer Francis Trees & Watts. “If you are invested in countries like the Netherlands you can find that what were safe- haven positions have become correlated with what’s going on in the periphery, when actually the economic fundamentals are still very good.”

The extra interest the Netherlands has to pay investors to hold its 10-year bonds instead of Germany’s rose to a two-year high of 68 basis points on Nov. 17 and stood at 37 basis points yesterday, almost triple this year’s low of 13 basis points reached in March. A measure of 60-day volatility on the so- called spread has more than doubled to 103 percent from 49 percent six months ago.

Austrian Spread

“The higher the volatility gets, the more important it becomes for investors,” said Niels From, chief analyst at Nordea Bank AB in Copenhagen. “When volatility levels are high it is more difficult for investors to hold on to positions even in countries that are labeled the inner core” like Austria, the Netherlands and Finland.

Austria’s 10-year spread over bunds swung between 84 basis points and a euro-era high of 192 basis points in November, even as the cabinet signed a draft law to cut its debt level to 60 percent of gross domestic product by 2020. The yield difference was 95 basis points at 4:22 p.m. London time yesterday, compared with an average 23 basis points during the past 10 years.

The Finland-Germany 10-year spread reached a two-year high of 79 basis points on Nov. 25, from a low 7 basis points low on Jan. 12, compared with a 35 basis-points average in the past year.

S&P Warning

The fluctuations show concern that the euro-region debt crisis may deepen is outweighing the safety implied in the nations’ top credit ratings and their economies’ relatively strong fundamentals.

S&P said in a statement yesterday that Germany and France may be stripped of their AAA ratings as the debt crisis prompts 15 euro nations to be put on review for possible downgrade pending the result of a European Union leaders summit.

The firm said that ratings could be cut by one level for Austria, Belgium, Finland, Germany, Netherlands and Luxembourg, and by up to two notches for the other governments.

Austria’s economy will probably expand 2.9 percent this year, Finland’s will grow 3.1 percent and the Netherlands’ 1.8 percent, according to the latest European Commission forecasts published last month, all bettering the euro-region’s aggregate of 1.5 percent.

The nations’ debt levels as a percentage of their gross domestic product are better than the euro-region average, the forecasts show, with Austria’s predicted to be 73 percent in 2012, Finland’s 52 percent and the Netherland’s 65 percent. That compares with the 90 percent average for all 17 euro-region countries.

Overseas Investors

About 75 percent of Finland’s bonds are owned by non- Finnish investors, Nordea estimates, which makes them more vulnerable to fluctuations in investor sentiment than their non- euro-region neighbor Sweden, where about 75 percent of the government’s bonds are held by domestic investors.

The yield premium investors demanded to hold Finnish 10- year debt over that of Sweden reached a euro-era high of 137 basis points on Nov. 24 and was 89 basis points yesterday. That compares with an average difference of 4 basis points since the 17-nation currency was introduced in 1999, according to Bloomberg generic data.

Dutch, Austrian and Finnish bonds also suffered as investors dumped holdings of euro-region securities and pushed the euro down 3 percent against the dollar through November, amid concern that the region’s leaders will struggle to bridge differences on a crisis resolution. Holders of euro-area bonds maturing between one and 10 years lost 2.6 percent last month, accord Bank of America Merrill Lynch indexes.

Geithner Meeting

With a EU summit in Brussels scheduled for Dec. 9, U.S. Treasury Secretary Timothy Geithner is due in Frankfurt today to prod political leaders. While a deal that safeguards banks, limits damage to Italy and Spain and increases rescue funds may help ease sentiment toward Europe, a fresh test will come next year when the euro-region countries face the challenge of issuing debt that UBS AG estimates at a minimum of 730 billion euros.

“Two weeks ago we had a very big move in the spread of Netherlands versus Germany, a 20 basis-point move in a single day, which is the biggest move I can remember, even before the euro began,” said Justin Knight, a European rate strategist at UBS Ltd. in London. “In a further escalation of the crisis we would see more moves like that. The real problem is that there aren’t enough buyers for Italian and Spanish government bonds and until that is addressed then the crisis will probably continue.”

‘More Wary’

Austria needs to raise 20 billion euros in 2012, the Netherlands 45 billion euros and Finland 10 billion euros, the UBS estimates show. While the amounts are small compared with Germany, which has 184 billion euros to raise, and Italy, which needs 221 billion euros, souring sentiment may cause problems for the three nations, said Eric Wand, a fixed-income strategist at Lloyds Banking Group Plc in London.

“Investors are going to be even more wary, which is going to make all auctions more difficult,” Wand said. “Holland and Austria and the other semi-core nations will probably be charged more going forward regardless of their fundamentals because of the contagion effect.”

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Bonds from AAA rated Austria, the Netherlands and Finland are suffering as Europe s debt crisis increases volatility and erodes their haven status. Sixty-day volatility on 10-year government debt from the three nations reached euro-era records in November, as investors...
Tuesday, 06 December 2011 07:20 AM
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