According to Zhitong Finance APP, several leading asset management companies globally are modifying investment rules for their bond funds to avoid forced selling of French government bonds. According to informed sources, a €1 billion (approximately $1.2 billion) fund from State Street and a €289 million product from BlackRock have recently stopped using indices with strict AA credit rating standards as performance benchmarks. This move allows them to maintain their positions in French government bonds even if France's credit rating is downgraded and falls below that threshold.
This proactive adjustment has already shown results. Last Friday, S&amp;P Global Ratings unexpectedly downgraded France's rating, causing the largest bond-issuing country in Europe to lose its average AA rating among the three major rating agencies. This will force other funds with extremely strict investment standards to sell French government bonds.
&#34;Adjusting the relevant benchmark indices is in response to clear client demands,&#34; said a spokesperson for State Street Global Advisors. A spokesperson for BlackRock declined to comment.
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Moody's Ratings will conduct a new round of assessments of France's credit rating this Friday. Currently, Moody's rates France at Aa3 (the lowest level of its AA rating), with a stable outlook. In September of this year, Fitch Ratings downgraded France's credit rating from AA- to A+.
France is not the only issuer facing rating pressure, and most funds can still invest in its government bonds. However, with nearly €3 trillion in outstanding bonds, if some funds are forced to sell due to rule restrictions, they will need to make significant adjustments to their asset allocations, while other funds may also be selling.
This will not only incur high transaction costs but also lead to portfolios concentrated in a few issuers, ultimately resulting in outcomes that may not align with client interests.
<h2>Lessons from Belgium</h2>
BlackRock's exchange-traded fund (ETF) timely adjusted its rules to successfully avoid the impact of France's rating downgrade. The catalyst for this action was Fitch's downgrade of Belgium's rating to A+ in June, which forced BlackRock to sell Belgian government bonds.
The previous performance benchmark for the fund (provided by S&amp;P Global Index) explicitly stated that if any bond is rated A+ or lower by any major rating agency, it &#34;will be excluded in the next index adjustment.&#34;
This standard is stricter than other index methodologies, which typically use the average ratings from multiple agencies. Consequently, BlackRock had to reduce its holdings of long-term Belgian government bonds at that time.
The risk posed by France is even greater: the country's government bonds account for nearly one-third of the fund's portfolio. Within weeks of the Belgian bonds being excluded from the index, BlackRock found a solution.
On July 18, the S&amp;P Index Division proposed lowering the minimum credit rating requirement for the benchmark index to BBB, while also establishing a list of eligible countries to ensure that the index composition remained consistent with the state before the exclusion of Belgian government bonds
The proposal was subsequently approved and officially took effect during the index adjustment at the end of September. Now, even if France's rating is further downgraded in the coming months, its government bonds can still remain in the index; meanwhile, Belgian government bonds have also returned to the fund's holdings.
BlackRock stated in a letter to ETF investors that this adjustment in methodology will avoid &#34;increased turnover of index constituents and a decline in index diversity.&#34;
<h2>Customized Solutions</h2>
On the other hand, State Street's &#34;Euro Core Treasury 10+ Year Bond Index Fund&#34; (IUT Euro Core Treasury 10+ Year Bond Index Fund), which had previously tracked the ICE BofA Eurozone 10+ Year AAA-AA Government Bond Index (ICE BofA 10+ Year AAA-AA Euro Government Index), has switched to a &#34;custom index&#34; compiled by Intercontinental Exchange Inc. as of June this year.
The rules and standards of the custom index are specified by the client, unlike the &#34;one-size-fits-all&#34; generic public benchmark index. As of the end of September, the proportion of French government bonds in this State Street fund reached 39%.
Other institutions in the market have also taken action earlier to exclude France from the rating requirement restrictions.
<h2>Market Sentiment Shift</h2>
Indeed, even after the recent rating downgrade, French government bonds remain firmly within the investment-grade category, which is a key threshold in bond fund investment standards.
Mara Dobrescu, Senior Director of Fixed Income Strategy at Morningstar, pointed out that for a few investors with AA investment standards, forced selling may actually create opportunities for other funds to acquire French government bonds at &#34;discounted prices.&#34;
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However, if France's rating is further downgraded, the greater impact may be reflected in global investor sentiment.
For many years, foreign investors have favored French government bonds: their yields are higher than German government bonds, while their credit quality is better and they do not exhibit the same volatility as Italian government bonds.
Analysts have stated, &#34;France may fall behind other eurozone issuers and lose its long-held 'golden position' in eurozone government bonds—this position has long attracted global investors.&#34; &#34;The cost will be a structural rise in government bond yields.&#34;

Multiple global asset management companies are modifying investment rules to avoid forced selling of French government bonds. State Street and BlackRock's funds will no longer use strict AA credit rating standards as performance benchmarks to address the risk of a downgrade in France's credit rating. This move aims to respond to client demands and avoid significant adjustments in asset allocation due to rating downgrades. Moody's will conduct a new round of assessments of France's credit rating this Friday

BlackRock and State Street adjust rules to maintain their positions in French bonds; the "golden position" in the Eurozone is precarious