UPDATE 1-Italian bond yields rise as Fitch Ratings review looms
Yields in broader euro zone debt markets fell, with weakness in Germany's economy highlighted by a survey showing business morale fell for the sixth time in succession in February. Italian bonds underperformed their peers with yields 3 to 6 basis points higher across the board .
Analysts said that while it was premature to expect a downgrade of Italy's credit rating on Friday, a deteriorating economic outlook had raised concerns about the ratings outlook. "There's enough goodwill following the budget deficit agreement with the EU last year to not downgrade Italy this time," said Ross Hutchison, rates portfolio manager at Aberdeen Standard Investments.
"My base case is that they keep that rating as is with a negative outlook." Fitch rates Italy BBB, two notches above the dividing line that separates investment grade bonds from non-investment grade territory.
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 and the country's longer-term ratings outlook.
"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," Goldman Sachs analysts 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 ratings agencies can shift demand for developed -market bonds when a rating approaches the threshold between investment grade and high yield.
Italian two-year bond yields were last up 8 basis points on the day at 0.55 percent. Ten-year yields rose 4 bps to 2.87 percent, pushing the gap over German Bund yields to 275 bps versus 269 bps late Thursday. German 10-year Bund yields fell 1.4 bps to 0.11 percent , holding lower after a fall in the closely watched Ifo business sentiment.
The Ifo economic institute said its business climate index fell to 98.5, the lowest level since December 2014, suggesting that company executives expect growth in Europe's biggest economy will continue to lose momentum. Other data showed euro zone headline consumer inflation slowed slightly in January because of a sharp deceleration of energy price growth, but core inflation watched closely by the European Central Bank edged slightly higher.
(Reporting by Dhara Ranasinghe Editing by Larry King/Mark Heinrich)
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