Slim Pickings for AAA-Rated Government Bonds

As France faces another downgrade to its government bonds, investors in ETFs tracking AAA-rated eurozone government debt may find their investment universe has shrunk

Jose Garcia-Zarate 23 November, 2012 | 5:55PM

This week the rating agency Moody’s announced it had downgraded French government bonds from the top-quality AAA rating to the one-notch lower rating, Aa1, with a negative outlook.  Moody’s decision followed in the steps of S&P, which stripped French government bonds of their prized AAA qualification in January.

As of this writing, Fitch is the only rating agency still classing French government bonds under the AAA umbrella. However, Fitch’s rating outlook for France was moved from stable to negative back in December 2011. There is a distinct risk that Paris might be in for a “full-house” of sovereign rating downgrades.

With two downgrades already in the bag, investors in exchange-traded-funds (ETFs) that track indices measuring the performance of the eurozone AAA-rated government bond market are probably wondering whether they will soon be invested in “de facto” German government bond ETFs. Indeed, a rational investor would assume that French government bonds can no longer be part of those indices. If so, the statistical void left by France would have to be redistributed amongst the remaining AAA bond markets, with Germany as the overwhelmingly dominant force against the much smaller Dutch, Austrian and Finnish elements.

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About Author

Jose Garcia-Zarate

Jose Garcia-Zarate  is Associate Director of Passive Strategies Research for Morningstar Europe

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