Moody’s (NYSE:) Investors Service has reduced France’s credit rating to Aa3 with a stable outlook from the previous Aa2 with a negative outlook.
This unexpected downgrade follows the credit rating agency’s decision to change France’s outlook to negative during the last official review on October 25.
The revision is not anticipated to significantly affect the markets. In fact, it might have a modestly positive impact on France’s shorter and medium-term bonds.
The stable outlook attached to the new Aa3 rating suggests that Moody’s does not foresee a further downgrade in the upcoming 12 months, which could reassure investors who have been concerned about France’s creditworthiness.
Despite this downgrade, French government bond risk premiums have stayed high in recent weeks, contrasting with the tightening premiums of most other Eurozone countries.
Yield comparisons indicate that French short-term bond yields are roughly equivalent to those of Spain, which holds a Baa1/A rating. For bonds with maturities between 5 to 10 years, French yields are comparable to those of Greek bonds, rated at Ba1/BBB-.
The outlook for France as an issuer remains deteriorating, with expectations set for further downgrades. It is projected that either Standard & Poor’s, currently rating France at AA- with a stable outlook, or Fitch, rating it at AA- with a negative outlook, will be the first to lower France’s rating to A+ within the next year.
Bond valuations appear to reflect this anticipated trajectory, with 1 to 4-year French bonds offering value when compared to peers with similar ratings. However, long-dated French bonds are advised against, as they are expected to be more affected by negative political and economic developments.
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