Ratings agency Moody's has downgraded four iShares fixed income ETFs with exposure to Italian government debt.
This follows the downgrade of Italy's government bonds from Aa2 to A2 on 4 October.
The four ETFs tracks indices based on the Barclays Capital Euro Government Bond Term range, which includes government bonds from France, Germany, Italy, the Netherlands and Spain.
iShares Euro Government Bond 1-3 Year ETF was downgraded from Aaa to Aa2 and remains on review; iShares Euro Government Bond 3-5 Year ETF was downgraded from Aaa to Aa2 and it remains on review; iShares Euro Government Bond 15-30 Year ETF was downgraded from Aa1 to Aa2 and it remains on review; iShares Euro Inflation Linked Bond ETF was downgraded to A1 from Aa3.
Three ETFs are on review for a possible downgrade to reflect the funds' investment in Spanish government debt, which is currently on review.
"The downgrade of the four funds comes as a result of credit deterioration amongst underlying holdings in the funds. These funds are physical replicated ETFs and they replicate indices which hold Italy. The Italian sovereign was downgraded earlier in the week," says Michael Eberhardt, vice president, senior analyst at Moody's.
He notes that the funds also have exposure to German, French and Spanish bonds.
iShares Euro Government Bond 1-3 Year and 3-5 ETFs also had their market risk ratings downgraded from MR2 from MR1 and from MR2 to MR3, respectively. This reflects an increase in the funds' performance volatility.
iShares Global Inflation Linked Bond ETF had its Aa1 rating and MR5 market risk rating affirmed.
Eberhardt says that while he cannot comment on investor behaviour, "I would say investors would obviously select or choose to participate in euro 1-3 or 3-5 year to gain exposure to the space. I expect they would understand the nature of the index they are being exposed to".
An iShares spokesperson said: "We expect no direct impact in any of the iShares funds. The funds will continue to track the indices they are benchmarked against and will function in accordance with the investment objectives and investment policies defined within the iShares fund prospectus."
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