Pimco sells Dutch bonds as AAAs diverge on politics

Being part of an exclusive club isn’t doing much anymore for Dutch borrowing costs.

The country’s bond yields are rising at a faster pace than those of Austria, Germany and Finland, the other euro members along with Luxembourg with a AAA grade from at least two of the three major ratings companies. The extra yield on 10-year French bonds, rated one step lower, over Dutch securities narrowed to the least in three months. Pacific Investment Management Co. was among the sellers of Dutch bonds.

“It’s clear that a higher risk premium for the Netherlands could be in place,” Ben Emons, a senior portfolio manager at Pimco who helps oversee $75 billion, said in an interview from Newport Beach, California. “It may even increase to French levels if the Netherlands is downgraded and the economy continues to contract.”

While the Netherlands is stuck in a second year of recession and unemployment is at the highest in almost two decades, the divergence among the euro’s AAA countries reflects politics as much as economics.

Prime Minister Mark Rutte’s government, which was elected in November after the previous coalition collapsed over disagreements on austerity measures, is struggling to win political backing for additional spending cuts to meet European Union budget-deficit limits next year.

“There is a risk that the coalition cannot agree on what to do, ending up delivering something half-hearted,” said Jan Von Gerich, chief strategist at Nordea Bank in Helsinki. “If that is the case, there is an increasing chance that the markets see fiscal slippage, while weak economic performance continues and the government is seen as incapable of acting.”

The Dutch government sold 2.21 billion euros ($2.9 billion) of three-month bills today at an average yield of zero, up from a negative 0.01 percent at an offering in July. The country also sold securities maturing in 205 days at an average yield of 0.021 percent, compared with 0.010 percent when they sold 198 day securities in July.

Dutch 10-year bonds yield 2.05 percent. That means the extra yield that investors get for holding French 10-year bonds instead of similar-maturity Dutch paper has declined to 15 basis points, the least since May 2 and down from 50 basis points at the end of last year.

When compared with AAA peers, the premium on Dutch bonds over German bunds increased to 40 basis points from 18 basis points on Dec. 31. The comparable spread for Austrian bonds over bunds is 40 basis points, down 3 basis points since the end of 2012. Finland’s yield gap with Germany widened 7 basis points to 28 in the same period.

The last ratings company to change its outlook for the Netherlands was Fitch Ratings, which revised the country down to negative from stable on Feb. 5 because of the level of public debt, falling property prices and concern about the financial health of some banks.

Moody’s Investors Service lowered its Dutch outlook to negative on July 23, 2012, while Standard & Poor’s has had a negative outlook for the rating since Jan. 13, 2012.

Investors have been paying less attention to Moody’s and S&P as yields on sovereign securities moved in the opposite direction from what ratings suggested in 53 percent of 32 upgrades, downgrades and changes in credit outlook in 2012, according to data compiled by Bloomberg published in December.

Rutte, 46, needs to seal an agreement with his coalition partner on 6 billion euros of cost cuts and tax increases in addition to a four-year, 16 billion-euro package decided on in November when the current government was installed.

In the meantime, the two parties in the coalition are losing popularity among the electorate. They would win 54 seats of 150 if an election was held, according to the Political Barometer, a July 25 poll done by market research institute Ipsos. They won 79 seats in November.

“There’s certainly austerity fatigue, but it’s probably not as extreme as in countries like Greece or Spain,” said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. “The bonds have been on a widening trend since January. They have their economic problems.”

The Dutch economy contracted by 0.4 percent in the first quarter, the statistics office in The Hague said on June 25. The government’s planning agency said June 14 that gross domestic product will decline 1 percent this year before growing by 1 percent in 2014. Consumer confidence deteriorated in July to the lowest level since March, the office said on July 18.

“The Dutch curve has already deviated from the Finnish one, indicating the markets have clearly started to price in the troubles of the Dutch economy,” said Von Gerich. “This pricing is unlikely to be complete yet.”