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Prospects Daily: U.S. treasuries extend gain as Moody’s warns possible downgrade on France

Global Macroeconomics Team's picture

Important developments today:

1. U.S. treasuries extend gain as Moody’s warns possible downgrade on France.

2. Economic expectations drop to three-year low in Germany


U.S. treasuries extend gain as Moody’s warns possible downgrade on France. Treasury prices moved higher for a second day on Tuesday after credit rating agency Moody’s said that France’s top sovereign credit rating (‘Aaa’) is under pressure, adding to fading hopes for a quick resolution to the region’s debt crisis. Moody’s warned on Monday, proposals to beef up the European Financial Stability Facility (EFSF) would increase the contingent liabilities for France, which may stretch the country’s budget too much. The benchmark 10-year treasury yields declined 4 basis points (bps) to 2.12% amid renewed support for safe-haven government debt. German’s 10-year bund yields also fell 7 bps to 2.02%, while France’s 10-year yields jumped 8 bps to 3.13% on rating concerns. The yield spread between French and German securities now stands at the highest level since the euro’s 1999 debut.

Economic expectations drop to three-year low in Germany. Concerns about the ongoing eurozone debt crisis and a slowdown in the global economy continue to weigh heavily on German investors. The Center for European Economic Research’s (ZEW) closely watched index of economic expectations continued its descent in October. The index fell by 5 points to minus 48.3, well below its historical average of 25.6, showing that the ongoing uncertainty in the eurozone continues to dampen German investor confidence [see Chart]. Indeed, German investor confidence is at a three year low, nearing the record lows of minus 60 at the time of the Lehman collapse. The weaker economic expectation is already affecting the real economy as both retail sales and industrial orders are down, suggesting that German companies and consumers are beginning to delay investment and spending. As the largest economy in the eurozone, the recent German data suggest that further growth impulses are drying up even for one of the most dynamic eurozone economies - this is also likely to further dampen growth prospects in other eurozone economies.

Among Emerging East Asia and the Pacific, China's annual economic growth eased slightly to 9.1 percent in the third quarter, expanding at its slowest pace since early 2009 as the central bank aggressively tightened monetary policy and easing foreign demand damped activity.