“The S&P move is yet another signal that euro area countries must take decisive action to deal with the crisis or else the problems will spread from Greece and others with the most acute fiscal problems to the rest of the euro zone,” said Phillip Swagel, a professor of economics at the University of Maryland's School of Public Policy who was an assistant secretary for economic policy in the George W. Bush administration. “It is time for Germany and France to act — either to save Greece and the others or to let them fail.”

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

S&P said it maintained the negative outlook for Cyprus, and Greece wasn't put on “creditwatch.”

S&P roiled global equity, bond, currency and commodity markets on Nov. 10, when it sent and then corrected an erroneous message to subscribers suggesting France's rating had been downgraded.

Downgrades of Germany and France would affect the rating of the European Financial Stability Facility, the bailout fund for struggling euro member countries that has funded rescue packages for Greece, Ireland and Portugal partially through bond sales. If the EFSF has to pay higher interest on its bonds, it may not be able to provide as much funding for indebted nations.

EFSF Yields

Yields on EFSF 3.375 percent bonds due in July 2021 2 basis points, snapping a five-day rally, to 3.6 percent, according to Bloomberg prices.

“Negative news is going to continue to spur rallies in the Treasury markets, at least until the ECB steps in to end this mess once and for all,” Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, said before the announcement. “With the euro currency in a state of flux, the U.S. markets remain the only true safe haven.”

S&P downgraded the U.S.'s AAA credit rating by one level to AA+ for the first time Aug. 5, citing the nation's political process and criticizing lawmakers for failing to cut spending or raise revenue enough to reduce record budget deficits.

Investors nevertheless sought Treasuries after the S&P rating cut sparked financial market turmoil. Treasuries gained 6.4 percent last quarter, their best performance since the last three months of 2008, according to Bank of America Merrill Lynch index data.

The rating company's decision on the U.S. was flawed by a $2 trillion error, according to the Treasury Department. S&P disputed the Treasury's assertions and said using the department's preferred spending measures in its analysis didn't affect its credit grade.

Moody's Investors Service and Fitch Ratings affirmed their AAA credit ratings on Aug. 2, the day President Barack Obama signed a bill ending an impasse with lawmakers over raising the nation's debt ceiling.

Federal Reserve Chairman Ben S. Bernanke said Treasury securities remain a core holding for investors. “The downgrade didn't scare off any investors,” and the action, along with the prospect of other downgrades, hasn't done “significant damage” to the economy, Bernanke said at a Nov. 10 at a town-hall-style event in El Paso, Texas.

German bunds are underperforming Treasuries for the first time since the European debt crisis began in 2009.

Treasuries due in 10 years or more are 2011's best-performing sovereign securities, returning 26 percent as of Nov. 30, according to Bloomberg/EFFAS indexes. German 30-year bunds yielded more than their U.S. peers last month for the first time since May 2009 as the government was only able to find buyers for 65 percent of a 6 billion euro ($8.1 billion) offering on Nov. 23, its worst auction in 16 years.

Credit-default swaps tied to France climbed 4 basis points on Dec. 2 to 196 basis points, while contracts insuring against a default on Germany's debt were about unchanged 97 basis points, CMA data show. That compares with 51 basis points for credit swaps on the U.S. and 90 basis points for the U.K.

A basis point on a credit-swap contract protecting $10 million of debt for five years is equivalent to $1,000 a year. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

Bond yields of countries stripped of their AAA ratings since 1998 have historically been little changed following the credit grade change, according to an Oct. 28 report from JPMorgan Chase & Co. analysts led by Terry Belton, global head of fixed-income and foreign-exchange research. The yield on 10- year Japanese government debt rose 10 basis points the week after it was cut to Aa1 by Moody's in November 1998. The interest rate declined 3 basis points following the cut by S&P to AA+ in February 2001.

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