France’s borrowing costs are rising as Europe’s debt crisis makes investors wary of lending to any nation other than Germany. “There is only one sovereign in Europe, and that is Germany,” said Stuart Thomson, who helps oversee about $120 billion as a portfolio manager at Ignis Asset Management in Glasgow. “Everything else is a credit and trades like a credit, even France.” Investors currently demand about 90 basis points of extra yield to buy 10-year French debt rather than German bunds, even though both carry AAA grades from the major rating companies. That spread is almost triple the 2010 average of 33, and compares with 17 in the second half of the previous decade. The cost of insuring French debt rose to a record today. The ECB bought Italian and Spanish bonds for a third day today as it tries to halt a market rout, pushing Spain’s 10-year yield below 5 percent for the first time since December. The central bank’s previous round of bond purchases, though, failed to protect Ireland and Portugal from following Greece in needing financial aid as their funding costs surged. French bonds are the most costly AAA government securities to insure as investors raise bets that top-rated euro-region nations may be next in the firing line after the U.S. was downgraded by one notch to AA+ by S&P on Aug. 5. Credit-default swaps on France trade at 163 basis points, double the rate to protect German securities. Stick With Bunds “The threat to the French AAA rating is worrying,” said Padhraic Garvey, the head of developed-debt market strategy at ING Groep NV in Amsterdam. “Our credit-rating model identifies France as the weakest of the euro-zone AAA-rated issuers. In this risk-averse environment, we suggest investors stick to the core bonds, and German debt remains our favorite choice.” Moritz Kraemer, the head of European sovereign ratings at Standard & Poor’s, told Handelsblatt newspaper that the rating outlook for France is stable and the firm doesn’t expect to downgrade the country within the next two years. The latest round of global financial turmoil was exacerbated by S&P’s downgrade of the U.S. credit rating at the end of last week. The additional yield investors demand to hold other AAA bonds instead of German debt has soared. The yield spread between Dutch 10-year securities and German bunds is 39 basis points, compared 19 at the start of the year. Denmark’s yield spread has climbed to 26 from 6 in January. Deficit Advantage Germany’s budget deficit is 2.3 percent of gross domestic product, compared with 10.8 percent for the U.S. and 6 percent for France. That’s the smallest in the euro region after Luxembourg. Its economy grew 4.9 percent in the first quarter from a year ago, a rate unrivalled by its peers in the Group of Seven nations. The International Monetary Fund increased its 2011 growth forecast for Germany to 3.2 percent this month from 2.5 percent predicted in April. German bonds have beat their euro-region counterparts this year, handing investors a return of 4.9 percent compared with a 3.4 percent gain from French debt, 4.4 percent for Dutch bonds, and a loss of 0.5 percent on Italian securities. ‘Few Incentives’ “If the ECB is successful in bringing down Italian and Spanish bond yields, and I hope it is, then that will be at the expense of German bonds,” said Steve Major, head of fixed- income research at HSBC Holdings Plc in London. “That will only happen if the ECB can reduce volatility as well. Otherwise, there will be few incentives for investors to hold peripheral debt.” German 30-year debt offers 3.08 percent, down from as high as 3.97 percent in April and compared with the 5.95 percent available on Italian debt. “German yields at these levels don’t offer much of a value,” Mohit Kumar, the head of the euro-region and U.K. interest-rate strategy at Deutsche Bank AG in London. “But risk aversion is a major factor here. I cannot say there is no risk out there and I would not say investors should be selling German bunds.” To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; To contact the editor responsible for this story: Mark Gilbert at magilbert@bloomberg.net

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