UPDATE 1-No news is good news for Italian bonds as Moody's holds rating
Broader euro zone bond yields were largely unchanged as the market waited for clarity on Britain's Brexit negotiations and this week's U.S. Federal Reserve meeting. Moody's on Friday left Italy's Baa3 credit rating unchanged, pushing Italian government bond yields to their lowest since May 2018. Standard & Poor's upgraded Portugal to BBB, and the Portuguese 10-year government bond yields fell to their lowest in at least 25 years.
"Portugal was upgraded but even more important was that Moody's didn't do anything with Italy's rating, despite ongoing headlines," said Sebastian Fellechner, rates strategist at DZ Bank. "The non-ratings decision is helping the market." Italy's 10-year government bond yield fell by over six basis points on the day to a low of 2.43 percent, its lowest since May 2018. Its spread over higher-rated Germany narrowed to its tightest since September 2018 at 234 basis points.,
Portuguese yields fell after Standard & Poor's raised Portugal's BBB- credit rating, citing declining debt and balanced growth, with the rally intensifying as the session wore on. The ratings agency said it expects the Portuguese economy to grow 1.5 to 1.7 percent during 2019-2021. It also expects Portugal to record a budgetary surplus and to reduce the ratio of public debt to gross domestic product.
Ten-year Portuguese government bond yields fell to 1.25 percent, also down six basis points on the day, having slid after the European Central Bank announced a further round of targeted long-term financing operations on March 7. "I bought into the Portugal auction last week," said David Slater, portfolio manager at Trium Capital.
"I think there's a lot of positive momentum in Portugal. That was a new position because I went long into the (rating) announcement on Friday. In general over the past year I've played Portugal from the long side." The spread of Portuguese 10-year government bonds over Germany has narrowed by about 40 basis points since the start of the year and was last at 114 basis points.
The rally in the periphery also helped Spanish bonds with 10-year yields down three basis points to 1.17 percent . Elsewhere, French 10-year government bond yields were largely unchanged after more weekend violence linked to the yellow vest protest movement. France's prime minister is due to announce new security measures.
Supply is also due to pick up this week with 19 billion to 24 billion euros of primary activity, according to UniCredit analysts who say this will likely be the heaviest week in 2019. (Reporting by Virginia Furness with additional reporting by Jo Mason Editing by Mark Heinrich)
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