Euro Downgrades Make Bond Bears’ “Concerns” A Reality (UUP, FXE, FXY, EUO, EWQ)

January 15, 2012 1:25pm NYSE:EUO NYSE:EWQ

Jonathan Yates: As reported in previous articles on, shaking a tin cup filled with euro bonds did not entice China, Warren Buffett or Jim Rogers into buying any of the

sovereign debt.

Standard & Poor’s made the same point in downgrading France and Austria last week. Before the action, each was rated “AAA.” Also downgraded by Standard & Poor’s were Italy, Spain and Portugal, which were already lower rated to begin with.

In an article in the Financial Times, by Gerrit Wiesmann,  Peter Spiegel and Robin Wigglesworth, French  Finance Minister Francois Baroin stated “It is not good news, but it is not a catastrophe. It is not the ratings agencies that dictate the policies of France.”

Well, maybe — but downgrading France (NYSEARCA:EWQ) and others will raise the borrowing costs of the sovereign debt issued to fund government programs.  This greater expense will reduce what can be done with a pan-European bond issue.

Thanks to these downgrades, the entire continent has to deepen its push toward austerity in order to finance the debt it needs to issue. In addition, creditors will impose harsher covenants, forcing even greater cutbacks from European governments.

As more than one financial executive has noted over the years, when the free market imposes its will it is always crude, rude and effective.

Such was the case last week with currency exchange-traded funds in response to the downgrades.  CurrencyShares Eurotrust (NYSEARCA:FXE) closed down $1.43 and is near its 52-week low of $125.75.

The PowerShares US Dollar (NYSEARCA:UUP) was up Friday and is near its 52-week high.  At $36.52, ProShares Ultra Yen (NYSEARCA:YCL) is also close to its 52-week high. And the short euro bond fund (NYSEARCA:EUO) is surging also.

Written By Jonathan Yates From Emerging Money

Emerging Money provides insightful and timely information about the increasingly important world of Emerging Market investments. CNBC Emerging Markets Contributor Tim Seymour leads the team of Emerging Money to bring you cutting edge global news and analysis.

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