The euro-zone's temporary bailout fund, the European Financial Stability Facility, is set to test investor appetite for six-month bills Tuesday in the wake of a downgrade from Standard & Poor's Corp that has generated concerns about the fund's future borrowing costs.
S&P downgraded the long-term rating on the EFSF to double-A plus from triple-A late Monday. The move followed a slew of downgrades Friday by the ratings company that included one-notch downgrades to EFSF triple-A guarantors France and Austria.
EFSF borrowing costs rose in early trading Tuesday, with the its 3.375% bond maturing in July 2021 eight basis points higher than Monday's close and yielding 3.13%, according to data from Tradeweb.
A euro-group statement issued after the S&P announcement said that this move would not reduce the EFSF's €440 billion ($557 billion) lending capacity. EFSF Chief Executive Klaus Regling said during a visit to Singapore on Tuesday that the downgrade by one agency should only have limited impact on the agency's borrowing costs.
European Central Bank President Mario Draghi told European Parliament Monday that the bailout fund could potentially have to lend less or get additional contributions from its remaining triple-A backers. Otherwise, if it loses its remaining triple-A ratings, it may have to make do with higher lending costs, he said.
All eyes will now turn to the €1.5 billion six-month treasury bill auction at 1100 GMT for any signs of further weakness in investor demand or sharply higher borrowing costs.
This auction comes into a busy market, with other sovereign euro-zone borrowers also looking for short-term cash. Before the EFSF auction, Spain will look to sell upto €5 billion of 12- and 18-month paper, Greece is looking for €1.25 billion of 13-week paper while Belgium will also sell up to €3 billion of 3- and 12-month debt.
Monday's reaction in the peripheral bond market to the Friday downgrades was muted, with early signs of weakness reversed as almost all peripheral yields ended lower on the day, aided by "reasonably aggressive ECB buying," according to one trader. This strength continued in early Tuesday session as peripheral yields continued to fall.
The French 10-year government bond shed 0.02 percentage points to yield 3.015%, Austria fell by 0.04 percentage points to 3.11% while Italian and Spanish 10-year yields fell by 0.12 percentage points and 0.05 percentage points to 6.48% and 5.09% respectively.
read more: Olympus Wealth Management
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