Moody’s lowered its credit rating for Spain by one step to Aa2

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German bunds and U.K. gilts rallied Thursday as a downgrade of Spain's debt rating by Moody's exerted more pressure on non-core euro zone government bonds and spurred investors to seek safer assets instead. The extra yield demanded by investors to buy Spanish bonds instead of the region's safe-haven bunds widened after Moody's Investors Service lowered Spain's rating to Aa2 and kept a negative outlook, indicating it could cut the rating further. Rival Fitch Ratings lowered Spain's rating outlook to negative last week. The 10-year Spanish/German yield spread was seven basis points wider at 227 basis points.

Bonds issued by debt-laden euro zone countries have been sold off this week on a combination of fresh supply as well as nervousness ahead of meetings of European Union leaders this month to find solutions to the debt crisis in the region. "The prospect of the EU summit is likely to keep peripherals under pressure at the short end of their domestic curves. The downgrade of Spain by Moody's can add weight on peripherals and favour cores," interest rate strategists at BNP Paribas said.

Moody’s lowered its credit rating for Spain by one step to Aa2, the third highest investment-grade ranking, and assigned a negative outlook to the debt, according to a statement released today. German bonds also rose after a government report showed exports from Europe’s biggest economy unexpectedly fell in January, following two months of gains. Spanish 10-year bonds fell for a third day.

“The Moody’s downgrade for Spain is likely to trigger some more demand for bunds today,” said Kornelius Purps, an interest-rate strategist at UniCredit SpA in Munich. “We are still in a negative ratings drift.”

The yield on the 10-year bund, Europe’s benchmark government security, fell five basis points to 3.24 percent as of 8:09 a.m. in London. The 2.5 percent security due January 2021 rose 0.425, or 4.25 euros per 1,000-euro ($1,384) face amount, to 93.875. Two-year note yields fell three basis points to 1.70 percent.

Spanish 10-year yields climbed three basis points to 5.54 percent, widening the spread over benchmark German bunds by nine basis points to 231 basis points, the most since Jan. 28. Two- year yields added four basis points to 3.30 percent.

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