Commentators have been having fun at the expense of the credit rating agencies recently, pointing out that after their downgrades markets have been upgrading various securities. It’s tempting to think the same after Moody’s two-notch downgrade of Italy today, with the euro up very slightly at $1.22 (although still close to a two-year low), while the 6 basis point rise in yield on Italy’s 10-year bonds is hardly dramatic by recent standards.
But that is to ignore the place where the downgrade really has power: Italian inflation-linked bonds. Moody’s actions will mean that Italian linkers fall out of the main Barclays index, which has stricter conditions than the main indices for nominal bonds.
Billions of euros of tracker funds will now have to sell Italian linkers, one of the biggest linker markets, eliminating a big source of demand – and showing what could happen if two of the three big rating agencies downgrade Italy to junk, knocking it out of the nominal indices. Read more
James Mackintosh is the Financial Times' Investment Editor, writing and presenting the daily Short View column and video. In 16 years at the FT his posts have included comment editor, motor industry editor and hedge funds correspondent, as well as spells in the Parliamentary lobby and Paris. He was the first reporter hired for FT.com, joining two weeks before it launched.
John Authers is the Financial Times' Senior Investment Columnist, writing the Saturday Long View and a regular Monday column. In a 22-year career at the FT, his previous posts have included global head of the Lex column, investment editor, US markets editor, Mexico City bureau chief and US banking correspondent. His latest book is The Fearful Rise of Markets. 