Italian bond yields rise as investors eye Fitch review with caution

Italian government bond yields crept up on Friday, reflecting caution among investors before a Fitch rating review. Broader eurozone debt markets were little changed before a German Ifo survey due to later this session for the latest clues on the state of the euro zone's powerhouse economy. Italian bonds underperformed their peers with yields 3 to 5 basis points higher across much of the bond curve.

Analysts said that it was premature to expect a downgrade of Italy's credit rating on Friday, but a deteriorating economic outlook had raised concerns about the rating outlook. "There is some nervousness ahead of the review, but I don't think there will be ratings cut - that might be too soon, given that Fitch only put Italy on a negative rating outlook in August," said KBC rates strategist Mathias van der Jeugt.

Italian bond sales later on Friday also explained the upward pressure on yields, he said. Fitch rates Italy BBB with a negative outlook. Moody's is scheduled to review Italian ratings in March, S&P Global in April.

Italy's economy slipped into a recession at the end of last year and many economists have downgraded their 2019 growth forecasts, raising concern about a weak fiscal position. "The worsening of the macro landscape in Italy raises the prospect that rating agencies could lower the rating or outlook assigned to Italian government bonds," analysts at Goldman Sachs said in a note this week.

Even a modest increase in the probability of a rating downgrade should not be underestimated, Goldman said, because decisions by rating agencies can shift demand for developed -market bonds when a rating approaches the threshold between investment grade and high yield. Italy's 10-year bond yield was last up 3 bps at 2.86 per cent. The gap over German Bund yields was 273 bps compared with around 269 bps late Thursday.

Germany 10-year Bund yields dipped a basis point to around 0.12 per cent before the closely watched Ifo business sentiment survey for February. A final reading of eurozone inflation in January is also due later. Analysts polled by Reuters forecast inflation slowed an annual 1.1 per cent in January from a month earlier, compared with zero per cent in December. The flash inflation estimate released at the start of the month did not include a monthly calculation. It showed inflation rose 1.4 per cent in January from a year earlier.