Portuguese yields fall after Moody"s raises ratings outlook

Portuguese yields fall after Moody"s raises ratings outlook
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Mon Nov 11, 2013 12:22pm EST

* Moody’s changes Portuguese rating outlook to stable

* Portuguese debt outperforms broader euro zone debt rebound

* Bunds rise after biggest one-day loss since September

By Emelia Sithole-Matarise and Ana Nicolaci da Costa

LONDON, Nov 11 (Reuters) – Portuguese bond yields fell near five-month lows on Monday, outperforming other euro zone debt after Moody’s raised its outlook on the country’s ratings to stable from negative.

The agency’s move after European markets closed on Friday was the latest in a series of news that has helped improve the market’s view on Lisbon since a government crisis sent 10-year yields back above an unsustainable 8 percent in July.

Portuguese 10-year government bond yields fell as much as 14 basis points to 5.86 percent, near troughs seen in early June. The yield gap between 10-year and two-year Portuguese bonds is near its widest since July – reflecting reduced concerns about the possibility of a debt restructuring.

“The Moody’s move on Friday evening does build on a fair degree of other positive moves that the Portuguese market has enjoyed over recent weeks … and the other thing helping has been positive newsflow on growth,” said Philip Shaw, chief economist at Investec.

Other lower-rated debt also rose, with Spanish and Italian 10-year yields falling 2 basis points to 4.11 percent and 4.13 percent respectively.

Portugal has started to recover from its worst recession since the 1970s and the International Monetary Fund said on Friday it was on track with its bailout and gave the indebted euro zone country another 1.9 billion euros.

“We live in a world where there’s a lot of hunger for yield and consequently against the backdrop of falling volatility and quiet newsflow it’s no surprise to us to see Portuguese bond spreads moving tighter,” said Mark Dowding, co-head of investment grade team at Bluebay Asset Management.

“That’s clearly been benefiting our investment performance where we have adopted an overweight stance,” said Dowding, whose team has $ 24.5 of assets under management and is overweight Portugal in its government bond portfolio. Bluebay is also overweight on Italy and Spain.

“BUY-DIPS” MENTALITY

Euro zone bonds mostly rallied after a sell-off on Friday when higher-than-expected U.S. jobs numbers brought forward bets of a cut in U.S. monetary stimulus.

Last week’s shock move by the European Central Bank to cut interest rates – and the stronger commitment to stimulate the economy that implies – is still supporting European debt markets. Most traders expect the ECB to pump more cheap long-term money into markets, according to a Reuters poll on Monday.

But investors are also returning to bets on the Federal Reserve scaling back its programme of bond-buying before March, after U.S. job growth unexpectedly accelerated in October. A Reuters poll after Friday’s numbers showed more primary dealers were leaning toward an earlier cut in stimulus.

That is broadly bad news for top-rated government bonds. German Bund futures settled 1 tick lower on Monday at 141.01, having seen their biggest one-day loss since September on Friday. German 10-year yields were steady at 1.76 percent .

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Reuters: Bonds News

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Moody"s, S&P and Fitch sued over failed Bear Stearns funds

Moody"s, S&P and Fitch sued over failed Bear Stearns funds
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By Karen Freifeld

NEW YORK Mon Nov 11, 2013 11:52am EST

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The logo of credit rating agency Moody’s Investor Services is seen outside the office in Paris October 24, 2011.


Credit: Reuters/Philippe Wojazer







NEW YORK (Reuters) – The liquidators of two Bear Stearns hedge funds filed a lawsuit on Monday against the three major U.S. rating agencies, accusing them of fraudulently assigning inflated ratings to securities in the run-up to the financial crisis.




The lawsuit seeks to recover damages from Moody’s Investors Service, Standard & Poor’s and Fitch Ratings in connection with more than $ 1 billion in losses sustained by the hedge funds.




The complaint, which was filed in New York state court in Manhattan, cites messages and emails by employees of the ratings agencies to help build a case that the agencies misrepresented their independence and objectivity.




“It could be structured by cows and we would rate it,” the 141-page lawsuit quotes an S&P employee as messaging a colleague.




Some of the same emails were cited in a civil fraud lawsuit brought by the Justice Department against S&P earlier this year. Fitch and Moody’s were not named in that lawsuit.




The latest case was brought by the liquidators of Bear Stearns High-Grade Structured Credit Strategies (Overseas) Ltd and Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage (Overseas) Ltd.




All three rating agencies said in statements that the allegations were “without merit.”




The liquidators filed a summons in the case in July, after a federal judge in California signaled that he would allow the U.S. Justice Department to pursue its $ 5 billion lawsuit against S&P.




The losses cited in Monday’s lawsuit were tied to funds managed by former Bear Stearns managers Ralph Cioffi and Matthew Tannin, who were acquitted in 2009 of federal criminal charges that they misled investors. Last year, the men agreed to pay about $ 1 million to settle a related U.S. Securities and Exchange Commission civil case.




S&P is owned by McGraw Hill Financial Inc (MHFI.N), Moody’s Investors is owned by Moody’s Corp (MCO.N), and Fitch is owned by Fimalac (LBCP.PA).




The case is Varga et al v. McGraw Hill Financial Inc et al, New York State Supreme Court, New York County, No. 652410/2013.




(Reporting by Karen Freifeld; Editing by Andrea Ricci)





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Reuters: Business News

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The Meaning of Moody"s Downgrade of the UK: Nothing

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Moody’s took away the UK’s triple A rating late Friday. A ratings downgrade has long been rumored, and although the timing is always surprising, the move itself has long been anticipated. Sterling slumped on the news in thin dealings, losing a cent in about 30 minutes.

 

When it comes to corporate ratings we can appreciate that rating agencies may have access to private information.  They may also be of value in some developing countries, where information is more difficult to secure.  However, when it comes to large developed countries, the rating agencies have access only to public information and it is the same information that investors use to make their decisions.

 

 

That there is extremely little value-added or new information contained in a rating agency is evident in the lack of market response to downgrades of Japan, the US, Austria, and France, for example.  There is little reason to expect the UK to be an exception to the rule.

 

Some observers are claiming the loss of the UK’s AAA rating is a serious blow to the UK government, but we are less convinced.  It is true that UK Prime Minister Cameron and Chancellor of the Exchequer Osborne had hoped its efforts to address the UK’s debt and deficit would have averted a downgrade.  The downgrade is not going to deter them from the austerity path upon which they have embarked. 

 

 It is politically naive to think see the downgrade as some opportunity for them to change course.  They have rejected the IMF’s calls to slow the austerity drive  What they did not surrender to the IMF, they will not yield to Moody’s or the government’s critics who what to use the downgrade to bludgeon the government into accepting its critic’s, including the Labour Party’s agenda.  

 

Reviewing the rationale behind Moody’s decision is like understanding an set of economists’ views.  It is a narrative constructed around well known facts.  The global economic weakness, especially in the euro area, and the “ongoing domestic public- and private-sector de-leveraging process” is generating poor growth in the UK and this may persist, Moody’s says into the second half of the decade.  

 

The weaker growth means that the debt/GDP ratio will remain elevated for longer.  Moody’s doesn’t expect it to peak until 2016.  The slower growth and higher debt ratio, in turn, means that the UK’s ability to absorb additional future shocks is more limited. 

 

Most investors will find nothing new in that assessment. Ironically, Moody’s demonstrated its firm grasp of the obvious the same day that the EU provided updated its forecasts.  It expects the UK economy to expand by 0.9% this year, compared with a 0.3% contraction in the euro zone, which incidentally absorbs 40% of the UK’s exports.

 

Lost in the initial reaction by many observers who wrung their hands at the downgrade, Moody’s reverted back to a stable outlook for UK debt and the rationale appears to also be shared by many investors.  Simply, even if crudely put, the UK is not Greece.  It has a highly diversified economy and strong institutions/  It has a favorable debt structure.  The average maturity of its debt at 15 years is the highest among the highly rated sovereigns.  It debt servicing capacity remains very strong.

 

Indeed, reading between the lines of Moody’s assessment suggests that, arguably, if UK government were to dilute its efforts to address the country’s debt and deficits, Moody’s may not have been so inclined to offer a stable outlook.

 

From a policy point of view, Cameron’s commitment to austerity is taken as given, then any change must come through two other channels:  monetary policy and the currency.  We learned in recent days that BOE Governor King was out-voted for the fourth time in his tenure.  He wanted to resume gilt purchases.  As has often been the case, he will likely get what he wants.  When Carney takes the helm in July, he also may be inclined to ease policy and it will be interesting to see if he is as tolerant of being outvoted.

 

Sterling has fallen 6.7% against the dollar, second among the major currencies to the yen which has lost 7.1% year-to-date.  It has declined about 6% on the BOE’s broad trade-weighted measure.  Just like the difference between expansion of the Federal Reserve’s balance sheet relative to the BOE’s balance sheet cannot explain this decline in sterling, so too sterling’s decline may not boost exports as much as some, especially those who have focused on currencies wars, would suspect.

 

There are several reasons for this counter-intuitive assertion.  First, surely we can all agree that foreign demand is important.  As we have noted, a major market for UK goods, the euro area, is expected to contract this year.  The US is also expected to slow from near 2% pace it has averaged since the economy bottomed nearly four years ago.

 

Second, the restructuring of the UK’s financial sector and the changes in the globally, may curb its ability to export financial services.  Third, for many goods, there are important non-price dimensions to competitiveness, such a quality, design, speed of service, which will not be impacted by sterling’s decline.

 

What this all means is that the UK’s exports may be sufficient sensitive to sterling’s exchange rate to allow exports to replace the domestic aggregate demand being squeezed by the de-leveraging of the government and households.

 

From an investment point of view, we prefer UK equities over bonds.  The FTSE 100 has a dividend yield of 3.7%, while the 10-year bond yields about 2.1%  Sterling’s broad trade-weighted index is the most inversely correlated to the FTSE 100 since early 2007 near -0.44 on a 60-day rolling basis using percent change.  Running the correlation on simply the level of the FTSE 100 and the trade-weighted index is near 0.93, the highest since late-2004.  The sterling-dollar rate is (on a 60-day percent basis) about 0.71 correlated with the trade weighted measure.  

Zero Hedge

The Meaning of Moody"s Downgrade of the UK: Nothing

Farewell AAA: Moody"s Downgrades The UK From AAA To Aa1

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Just the headline for now:

• MOODY’S DOWNGRADES UK’S GOVERNMENT BOND RATING TO Aa1 FROM AAA

Someone must have clued Moody’s on the fact that the UK is about to have its very own Goldman banker, which means consolidated debt/GDP will soon need four digits. In other news, every lawyer in the UK is now celebrating because come Monday Moody’s will be sued to smithereens.

Full report below:

Moody’s downgrades UK’s government bond rating to Aa1 from Aaa; outlook is now stable
 
London, 22 February 2013 — Moody’s Investors Service has today downgraded the domestic- and foreign-currency government bond ratings of the United Kingdom by one notch to Aa1 from Aaa. The outlook on the ratings is now stable.
 
The key interrelated drivers of today’s action are:
 
1. The continuing weakness in the UK’s medium-term growth outlook, with a period of sluggish growth which Moody’s now expects will extend into the second  half of the decade;
 
2. The challenges that subdued medium-term growth prospects pose to the government’s fiscal consolidation programme, which will now extend well into the next parliament;
 
3. And, as a consequence of the UK’s high and rising debt burden, a deterioration in the shock-absorption capacity of the government’s balance sheet, which is unlikely to reverse before 2016.
 
At the same time, Moody’s explains that the UK’s creditworthiness remains extremely high, rated at Aa1, because of the country’s significant credit strengths. These include (i) a highly competitive, well-diversified economy; (ii) a strong track record of fiscal consolidation and a robust institutional structure; and (iii) a favourable debt structure, with supportive domestic demand for government debt, the longest average maturity structure (15 years) among all highly rated sovereigns globally and the resulting reduced interest rate risk on UK debt.
 
The stable outlook on the UK’s Aa1 sovereign rating reflects Moody’s expectation that a combination of political will and medium-term fundamental underlying economic strengths will, in time, allow the government to implement its fiscal consolidation plan and reverse the UK’s debt trajectory. Moreover, although the UK’s economy has considerable risk exposure through trade and financial linkages to a potential escalation in the euro area sovereign debt crisis, its contagion risk is mitigated by the flexibility afforded by the UK’s independent monetary policy framework and sterling’s global reserve currency status.

In a related rating action, Moody’s has today also downgraded the ratings of the Bank of England to Aa1 from Aaa. The issuer’s P-1 rating is unaffected by this rating action. The rating outlook for this entity is now also stable.
 
RATINGS RATIONALE
 
The main driver underpinning Moody’s decision to downgrade the UK’s government bond rating to Aa1 is the increasing clarity that, despite considerable structural economic strengths, the UK’s economic growth will remain sluggish over the next few years due to the anticipated slow growth of the global economy and the drag on the UK economy from the ongoing domestic public- and private-sector deleveraging process. Moody’s says that the country’s current economic recovery has already proven to be significantly slower — and believes that it will likely remain so — compared with the recovery observed after previous recessions, such as those of the 1970s, early 1980s and early 1990s. Moreover, while the government’s recent Funding for Lending Scheme has the potential to support a surge in growth, Moody’s believes the risks to the growth outlook remain skewed to the downside.
 
The sluggish growth environment in turn poses an increasing challenge to the government’s fiscal consolidation efforts, which represents the second driver informing Moody’s one-notch downgrade of the UK’s sovereign rating. When Moody’s changed the outlook on the UK’s rating to negative in February 2012, the rating agency cited concerns over the increased uncertainty regarding the pace of fiscal consolidation due to materially weaker growth prospects, which contributed to higher than previously expected projections for the deficit, and consequently also an expected  ise in the debt burden. Moody’s now expects that the UK’s gross general government debt level will peak at just over 96% of GDP in 2016. The rating agency says that it would have expected it to peak at a higher level if the government had not reduced its debt stock by transferring funds from the Asset Purchase Facility — which will equal to roughly 3.7% of GDP in total — as announced in November 2012.
 
More specifically, projected tax revenue increases have been difficult to achieve in the UK due to the challenging economic environment. As a result, the weaker economic outturn has substantially slowed the anticipated pace of deficit and debt-to-GDP reduction, and is likely to continue to do so over the medium term. After it was elected in 2010, the government outlined a fiscal consolidation programme that would run through this parliament’s five-year term and place the net public-sector debt-to-GDP ratio on a declining trajectory by the 2015-16 financial year. (Although it was not one of the government’s targets, Moody’s had expected the UK’s gross general government debt — a key debt metric in the rating agency’s analysis — to start declining in the 2014-15 financial year.) Now, however, the government has announced that fiscal consolidation will extend into the next parliament, which necessarily makes their implementation less certain.
 
Taken together, the slower-than-expected recovery, the higher debt load and the policy uncertainties combine to form the third driver of today’s rating action — namely, the erosion of the shock-absorption capacity of the UK’s balance sheet. Moody’s believes that the mounting debt levels in a low-growth environment have impaired the sovereign’s ability to contain and quickly reverse the impact of adverse economic or financial shocks. For example, given the pace of deficit and debt reduction that Moody’s has observed since 2010, there is a risk that the UK government may not be able to reverse the debt trajectory before the next economic shock or cyclical downturn in the economy.
 
In summary, although the UK’s debt-servicing capacity remains very strong and very capable of withstanding further adverse economic and financial shocks, it does not at present possess the extraordinary resilience common to other Aaa-rated issuers.
 
RATIONALE FOR STABLE OUTLOOK
 
The stable outlook on the UK’s Aa1 sovereign rating partly reflects the strengths that underpin the Aa1 rating itself — the underlying economic strength and fiscal policy commitment which Moody’s expects will ultimately allow the UK government to reverse the debt trajectory. The stable outlook is also an indication of the fact that Moody’s does not expect further additional material deterioration in the UK’s economic prospects or additional material difficulties in implementing fiscal consolidation. It also reflects the greater capacity of the UK government compared with its euro area peers to absorb shocks resulting from any further escalation in the euro area sovereign debt crisis, given (1) the absence of the contingent liabilities from mutual support mechanisms that euro area members face; (2) the UK’s more limited trade dependence on the euro area; and (3) the policy flexibility that the UK derives from having its own national currency, which is a global reserve currency. Lastly, the UK also benefits from a considerably longer-than-average debt-maturity schedule, making the country’s debt-servicing costs less vulnerable to swings in interest rates.
 
WHAT COULD MOVE THE RATING UP/DOWN
 
As reflected by the stable rating outlook, Moody’s does not anticipate any movement in the rating over the next 12-18 months. However, downward pressure on the rating could arise if government policies were unable to stabilise and begin to ease the UK’s debt burden during the multi-year fiscal consolidation programme. Moody’s could also downgrade the UK’s government debt rating further in the event of an additional material deterioration in the country’s economic prospects or reduced political commitment to fiscal consolidation.
 
Conversely, Moody’s would consider changing the outlook on the UK’s rating to positive, and ultimately upgrading the rating back to Aaa, in the event of much more rapid economic growth and debt-to-GDP reduction than Moody’s is currently anticipating.
 
COUNTRY CEILINGS
 
The UK’s foreign- and local-currency bond and deposit ceilings remain unchanged at Aaa. The short-term foreign-currency bond and deposit ceilings remain Prime-1.
 
IMPACT ON OTHER RATINGS
 
Moody’s will assess the implications of this action for the debt obligations of other issuers which benefit from a guarantee from the UK sovereign, and will announce its conclusions shortly in accordance with EU regulatory requirements. Moody’s does not consider that the one-notch downgrade of the UK sovereign has any implications for the standalone strength of UK financial institutions, or for the systemic support uplift factored into certain UK financial institutions’ unguaranteed debt ratings.
 
PREVIOUS RATING ACTION

Moody’s previous action on the UK’s sovereign rating and the Bank of England was implemented on 13 February 2012, when the rating agency changed the outlook on both Aaa ratings to negative from stable. For the UK sovereign, the actions prior to that were Moody’s assignment of a Aaa rating to the UK’s government bonds in March 1978 and the assignment of a stable outlook in March 1997. For the Bank of England, the action prior to the one from February 2012 was the assignment of a Aaa rating and stable outlook in March 2010.

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Farewell AAA: Moody"s Downgrades The UK From AAA To Aa1