UPDATE 2-Italy bond yields dip on bets of S&P ratings non-event

Italy's bond yield spread over Germany's briefly touched its widest level in two months on Friday before tightening decisively on bets that S&P Global will refrain from downgrading Italy at a scheduled rating review.

S&P Global will review Italy's sovereign credit rating after the market closes on Friday. It currently rates Italy BBB with a negative outlook. A downgrade to BBB- would put the rating just one level above junk. Italy is rated Baa3 by Moody's and BBB by Fitch. This risk has affected the Italian bond market in recent days, but analysts on Friday suggested it was unlikely that S&P would actually drag Italy's credit rating lower this week.

"It doesn't make a lot of sense for rating agencies to be ahead of the curve, so I wouldn't expect them to downgrade Italy today. It is possible that some investors are buying on this view," said Mizuho strategist Antoine Bouvet. Natixis rates strategist Cyril Regnat also said that S&P was unlikely to downgrade Italy later on Friday, though the wording of the accompanying statement could give the market an idea of where the rating was heading in the next six months.

Italian 10-year bond yields, having risen about 28 basis point in the past two weeks, dropped sharply by 6 bps on Friday to 2.63 percent. The closely-watched Italy/Germany 10-year bond yield spread, a barometer of investor sentiment towards the eurozone, was at its widest in two months in early trade at 270.7 basis points but eased to 265 bps by afternoon.

Italy is not the only southern European bond market in the spotlight. Spanish voters go to the polls this weekend in one of the most contentious elections in decades, with at least five parties in with a chance of being in the next government. The far-right party Vox is likely to win seats for the first time.

Yet Spanish 10-year yields also dropped, by about 4 bps to 1.05 percent. "Spain has so far avoided a populist government, kept the country together, tackled corruption, and 67 percent of the population has a favourable opinion of the EU," analysts at asset management firm Indosuez Wealth Management said in a note.

"As long as Vox does not enter a governing coalition, the Spanish elections could actually deliver a fillip to European markets." S&P is also due on Friday to review Greece's rating, currently B+, and a positive outlook suggests it may be upgraded.

German 10-year Bund yields, the benchmark for the eurozone, remain below zero as worry persists over the region's economy, and was a basis point lower on Friday at minus 0.025 percent. Elsewhere, U.S. Treasury yields fell following Friday's first-quarter growth report as weak inflation data tempered the strong headline figure. Eurozone bond market showed a little immediate reaction to the U.S. data.