Italy’s 10-year government bond yield yesterday fell to a one-week low, narrowing the gap over safer German peers after ratings agency Standard & Poor’s left its credit rating unchanged.
S&P on Friday left Italy’s rating at “BBB,” two notches above “junk,” but lowered its outlook to “negative” from “stable,” saying that the new government’s policy plans were weighing on Italy’s growth and debt prospects.
However, the decision to leave the rating unchanged a week after Moody’s downgraded it, bought some relief to a bond market hurt by Rome’s spending plans, tension with the EU and heightened concern about the implications of the ratings.
In early trade yesterday, yields on Italian government bonds were down 6 to 16 basis points across maturities.
Italy’s 10-year bond yield fell to a one-week low at 3.33 percent, while yields on most other eurozone peers were higher on the day as a firmer tone to European stock markets took the shine off broader fixed-income markets.
The fall in Italian bond yields narrowed the gap over top-rated German bond yields to 299 basis points from about 306 basis points late on Friday.
“The ratings update was a relief,” Commerzbank rates strategist Rainer Guntermann said. “The underlying budget concern is an ongoing issue, but the ratings risks are out of the way for the rest of the year, as there’s no more scheduled ratings decisions.”
While rating risks receded, the overall outlook for Italian debt remained bearish, analysts said.
If the bond yield spread between Italy and Germany rises to “unbearable levels,” the Italian government is ready to support domestic banks with loans, state guarantees and other measures, Corriere della Sera said in an unsourced report.
Outside Italy, most 10-year bond yields were up 1 to 2 basis points on the day as the recovery in Italian markets and broader European share markets dented demand for safe havens.
Analysts said limited bond supply from the eurozone this week and heavy redemptions should cap a rise in yields.
A heavy loss in a regional election for German Chancellor Angela Merkel’s Christian Democrats and its coalition partner had little effect on bond markets in early trade yesterday.
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