Tue, Sep 04, 2018 - Page 10 News List

Fitch review eases pressure on Italy

Reuters, LONDON

Italian bond yields yesterday edged lower after Fitch left its credit rating unchanged at “BBB,” revising only its outlook to “negative,” although mixed news flow from senior ministers could mean the rally is short-lived, analysts said.

Elsewhere yields edged higher across the eurozone, with trade wars and emerging market currency weakness prompting risk aversion.

On Saturday, US President Donald Trump said there was no need to keep Canada in the North American Free Trade Agreement (NAFTA).

Fitch on Friday retained its “BBB” credit rating for Italy, in a much-anticipated ratings review.

The agency changed the outlook for Italian debt, the world’s third-largest pile of state borrowing, to “negative” from “stable,” citing concerns about Rome’s “new and untested nature” and its promises to hike spending.

The limited move prompted buying of Italian government bonds after a large sell-off that saw short-end bond yields last week reach three-week highs.

Italy’s two-year yield fell as much as 9 basis points in early trade to 1.4 percent having touched highs of 1.49 percent last week. Its five-year yield was down about 6 basis points to 2.52 percent with longer-end bonds remaining about 2 basis points lower.

“Italy is benefiting from only the downgrade of the outlook, which was already priced in, though some investors may have expected a one-notch downgrade,” DZ Bank rates strategist Daniel Lenz said.

However, analysts said that the bid for Italian bonds could be short-lived, with conflicting statements from senior officials over Italy’s commitment to EU budget restrictions keeping investors on their toes, while currency woes in emerging markets remain in focus.

“I’m still 100 percent sure the good start will remain,” Lenz said. “We’re already seeing pressure on the [Turkish] lira and expect risk aversion will increase.”

Italian Deputy Prime Minister Matteo Salvini yesterday said he wants the budget deficit to be close to, but below, 3 percent of GDP.

On Saturday, investors were further soothed by Italian Minister of Economic Affiars Giovanni Tria, who said in Shanghai that the nation would respect EU commitments.

“We have commitments to Europe that must be respected, but they essentially are a function of the financial markets,” Tria said.

However, on Sunday Luigi Di Maio, another Italian deputy prime minister, promised to follow through on his party’s main campaign pledge of a universal income for poor people, which could put further pressure on the budget deficit.

German government bond yields remained pinned near recent lows, with its 10-year government bond, the benchmark for the region, at 0.34 percent, having reached 0.42 percent last week.

Other eurozone government bond yields were a touch higher.

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