Bonds from AAA rated Austria, the Netherlands and Finland aresuffering as Europe's debt crisis increases volatility and erodestheir haven status.

Sixty-day volatility on 10-year government debt from the threenations reached euro-era records in November, as investorsincreased bets the currency bloc may unravel and as yields onItalian and Spanish securities surged. The countries were among 15put on watch for a rating cut by Standard & Poor's yesterday.Europe's leaders will try to fashion a solution to the turmoil thisweek after the failure of their fourth rescue blueprint sparkedconcern that the crisis will infect all 17 euro nations.

“Volatility clearly has increased and it makes life a lottougher for investors,” said Alex Johnson, who helps oversee $47billion as London-based head of portfolio management at FischerFrancis Trees & Watts. “If you are invested in countries likethe Netherlands you can find that what were safe-haven positionshave become correlated with what's going on in the periphery, whenactually the economic fundamentals are still very good.”

The extra interest the Netherlands has to pay investors to holdits 10-year bonds instead of Germany's rose to a two-year high of68 basis points on Nov. 17 and stood at 40 basis points at 9:06a.m. London time today, more than triple this year's low of 13basis points reached in March. A measure of 60-day volatility onthe so-called spread has more than doubled to 103 percent from 49percent six months ago.

Austrian Spread

“The higher the volatility gets, the more important it becomesfor investors,” said Niels From, chief analyst at Nordea Bank AB inCopenhagen. “When volatility levels are high it is more difficultfor investors to hold on to positions even in countries that arelabeled the inner core” like Austria, the Netherlands andFinland.

Austria's 10-year spread over bunds swung between 84 basispoints and a euro-era high of 192 basis points in November, even asthe cabinet signed a draft law to cut its debt level to 60 percentof gross domestic product by 2020. The yield difference was 97basis points today, compared with an average 23 basis points duringthe past 10 years.

The Finland-Germany 10-year spread reached a two-year high of 79basis points on Nov. 25, from a low 7 basis points low on Jan. 12,compared with a 35 basis-points average in the past year.

The fluctuations show concern that the euro-region debt crisismay deepen is outweighing the safety implied in the nations' topcredit ratings and their economies' relatively strongfundamentals.

S&P said in a statement yesterday that Germany and Francemay be stripped of their AAA ratings as the debt crisis prompts 15euro nations to be put on review for possible downgrade pending theresult of a European Union leaders' summit.

The firm said that ratings could be cut by one level forAustria, Belgium, Finland, Germany, Netherlands and Luxembourg, andby up to two notches for the other governments.

Austria's economy will probably expand 2.9 percent this year,Finland's will grow 3.1 percent and the Netherlands' 1.8 percent,according to the latest European Commission forecasts publishedlast month, all bettering the euro-region's aggregate of 1.5percent.

The nations' debt levels as a percentage of their gross domesticproduct are better than the euro-region average, the forecastsshow, with Austria's predicted to be 73 percent in 2012, Finland's52 percent and the Netherland's 65 percent. That compares with the90 percent average for all 17 euro-region countries.

Overseas Investors

About 75 percent of Finland's bonds are owned by non-Finnishinvestors, Nordea estimates, which makes them more vulnerable tofluctuations in investor sentiment than their non-euro-regionneighbor Sweden, where about 75 percent of the government's bondsare held by domestic investors.

The yield premium investors demanded to hold Finland's 10-yeardebt over that of Sweden reached a euro-era high of 137 basispoints on Nov. 24 and was 99 basis points yesterday. That compareswith an average difference of 4 basis points since the 17-nationcurrency was introduced in 1999, according to Bloomberg genericdata.

Dutch, Austrian and Finnish bonds also suffered as investorsdumped holdings of euro-region securities and pushed the euro down3 percent against the dollar through November, amid concern thatthe region's leaders will struggle to bridge differences on acrisis resolution. Holders of euro-area bonds maturing between oneand 10 years lost 2.6 percent last month, according to Bank ofAmerica Merrill Lynch indexes.

With an EU summit in Brussels scheduled for Dec. 9, U.S.Treasury Secretary Timothy Geithner is due in Frankfurt today toprod political leaders. While a deal that safeguards banks, limitsdamage to Italy and Spain and increases rescue funds may help easesentiment toward Europe, a fresh test will come next year when theeuro-region countries face the challenge of issuing debt that UBSAG estimates at a minimum of 730 billion euros.

“Two weeks ago we had a very big move in the spread ofNetherlands versus Germany, a 20 basis-point move in a single day,which is the biggest move I can remember, even before the eurobegan,” said Justin Knight, a European rate strategist at UBS Ltd.in London. “In a further escalation of the crisis we would see moremoves like that. The real problem is that there aren't enoughbuyers for Italian and Spanish government bonds and until that isaddressed then the crisis will probably continue.”

'More Wary'

Austria needs to raise 20 billion euros in 2012, the Netherlands45 billion euros and Finland 10 billion euros, the UBS estimatesshow. While the amounts are small compared with Germany, which has184 billion euros to raise, and Italy, which needs 221 billioneuros, souring sentiment may cause problems for the three nations,said Eric Wand, a fixed-income strategist at Lloyds Banking GroupPlc in London.

“Investors are going to be even more wary, which is going tomake all auctions more difficult,” Wand said. “Holland and Austriaand the other semi-core nations will probably be charged more goingforward regardless of their fundamentals because of the contagioneffect.”

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