French Borrowing Rate Rises In Bond Auction

Published January 5, 2012 11:36AM (EST)

PARIS (AP) — France's borrowing rates rose slightly in a bond auction on Thursday as investor demand eased, underscoring concerns that Europe's debt crisis is testing confidence in even the region's biggest economies.

The results of France's sale of euro7.96 billion ($10.31 billion) in bonds helped weigh down market sentiment, with the euro losing 0.7 percent against the dollar and bank stocks falling on fears they will struggle to raise much-needed new capital.

Formerly routine affairs, European government bond auctions have become tense ordeals during the crisis. Countries that cannot raise money at reasonable rates at such sales must be rescued with bailout packages, and investors have grown concerned in recent months that even countries in the so-called European "core" could join that ignominious club. So far, only the relatively small economies of Greece, Ireland and Portugal have sought bailouts.

At the very least, if countries like France are forced to pay more to borrow money, they may become less willing — or able — to support their smaller neighbors.

France's bonds are under particular pressure because ratings agencies have threatened to lower its credit rating. Such ratings are one measure of risk, and investors demand higher returns — in the case of bonds, higher yields — for riskier investments.

After weeks of watching the bond yields of Italy, France and Spain rise, investors got a small respite this week. Germany and Portugal both sold bonds Wednesday at lower rates than previous auctions.

But France's auction, while solid, was not quite so good as those, and unease seemed to be returning to the markets. The euro dropped to $1.2842.

The majority of bonds sold Thursday were 10-years, which markets eye as a benchmark of investor confidence. Demand for them surpassed the supply but was considerably less than at an auction in December. The yield or interest rate on the 10-years was 3.29 percent, up from 3.18 percent last time. In total, euro4.02 billion were sold.

Twelve-year, 24-year and 30-year bonds were also sold also with healthy demand.

On the secondary market, where the issued bonds are later traded openly, the yield on French 10-year bonds was stable Thursday at 3.31 percent after the auction.

But yields of Italian and Spanish bonds were on the rise. Both countries are considered too big to bail out, so signs that investors might avoid their bonds are particularly worrying.

By Salon Staff

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