Fitch review of Italy rating expected after market close, market steady

Italy's battered bond market steadied on Friday before a Fitch Rating review that is in the spotlight due to concerns that the government's spending plans will put further strain on already high debt levels.

While most bond yields across the eurozone crept up, Italian borrowing costs fell following a sharp selloff late on Thursday as turbulence in emerging markets prompted a broader exit from risk assets.

Fitch is expected to release its review of Italy's credit ratings after markets close. It rates Italy BBB with a stable outlook.

Analysts say a Fitch downgrade is unlikely as the coalition government that came to power in June has yet to detail its spending plans. They did not rule out a cut in the outlook to negative, however.

Last week, rival agency Moody's said it was extending its review for a possible downgrade of Italian debt to gain "better visibility" on the fiscal path and reform agenda.

"There are several analysts saying that the market is priced for a ratings downgrade ahead," said Patrick O'Donnell, an investment manager at Aberdeen Asset Management.

"Our view is that the market is underpriced for the opening gambit of the budget talks. It looks like to us that you are going to get a pretty significant fiscal deficit and that may be negotiated back."

Italy's 10-year bond yield fell 2 basis points to 3.18 percent, down from Thursday's three-month highs but on track to end August with a rise of more than 40 bps.

The gap over benchmark German Bund yields was at 283 bps, having reached around 288 bps on Thursday -- the widest since July 2013.

"In our view, there is excessive bearishness around Italy and Italian spreads are pricing in too much euro break-up risk," said Mark Dowding, a senior portfolio manager at BlueBay Asset Management. He said he had been adding to an overweight position in Italian bonds in the past week.

The coalition of the far-right League and anti-establishment 5-Star Movement plans to raise spending and cut taxes, raising concern about Italy's debt sustainability and a potential clash with European Union rules on fiscal discipline.

5-Star is pushing for a budget deficit next year that is triple the previous government's goal and near double what Economy Minister Giovanni Tria is prepared to accept, Italian newspapers said on Friday.

La Repubblica reported that 5-Star wants a deficit equal to 2.9 percent of the gross domestic product, just within EU fiscal rules. Separately La Stampa reported that Tria was prepared to go to at least 1.5 percent, but not much further because of fears of a sell-off in Italian bonds.

EU Commissioner Guenther Oettinger meanwhile chided Italy on Friday about its high debt levels.

Outside Italy, euro zone bond yields were marginally higher and showed little reaction to data showing inflation in the bloc eased to 2 percent in August from 2.1 percent in July.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)