UPDATE 1-Fitch ratings review gives reprieve to Italian govt bond yields

Italian bond yields edged lower on Monday after Fitch kept its credit rating unchanged, though mixed messages from ministers and underwhelming manufacturing PMI data could mean the rally is short-lived, analysts said.

Elsewhere euro zone yields remained close to recent lows with trade wars and EM currency weakness prompting risk aversion. On Saturday, U.S. President Donald Trump said there was no need to keep Canada in the North American Free Trade Agreement (NAFTA).

German government bond yields remained close to their lowest level in the week with its 10-year government bond, the benchmark for the region, at 0.33 percent having reached 0.42 percent last week.

Fitch retained its BBB credit rating for Italy on Friday, in a much-anticipated rating review. But the agency changed the outlook for Italian debt, the world's third-largest pile of state borrowing, to "negative" from "stable", citing concerns about the populist government's "new and untested nature" and its promises to hike spending.

The limited move prompted buying of Italian government bonds after a large sell-off that saw short-end bond yields reach three-week highs last week.

Italy's two-year yield fell as much as nine basis points in early trade to 1.4 percent having touched highs of 1.49 percent last week. Its five-year, and 10-year yields were down around 6 bps to 2.52 percent, and 3.2 percent respectively with longer-end bonds remaining around 3 bps lower.

"Italy is benefitting from only the downgrade of the outlook, which was already priced in, though some investors may have expected a one-notch downgrade," said Daniel Lenz, rates strategist at DZ Bank.

Analysts say the bid for Italian bonds could be short-lived, however, with conflicting statements from senior officials over Italy's commitment to EU budget restrictions keeping investors on their toes, and emerging market currency woes remaining in focus.

"The finance minister has tried to calm things down this morning and that's had some impact on bonds but it's clear that it won't be (Economy Minister) Tria that makes the decision there," said Chris Scicluna, head of economic research at Daiwa Capital Markets. "And that's a reason to be wary of BTPs."

Italy's deputy prime minister Matteo Salvini said on Monday he wants the budget deficit to be close to, but below, three percent of GDP. On Saturday, investors were further soothed by Economy Minister Giovanni Tria who vowed in Shanghai to respect EU commitments.

"We have commitments to Europe that must be respected, but they essentially are a function of the financial markets," said Tria.

But on Sunday Deputy Prime Minister Luigi Di Maio had promised to follow through on his party's main campaign pledge - a universal income for the poor - which could put further pressure on the budget deficit.

In addition, Italian manufacturing data disappointed, slowing sharply in August to 50.1, very near the 50 mark that separates growth from contraction, its sixth fall in seven months. Spreads did not move in response however.

Other eurozone government bond yields were a touch higher.

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