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Italian bond yields drop across the curve after S&P ratings boost

  • S&P affirms Italy rating at BBB, lifts outlook to stable.
  • Italy's 10-yr yield down 9 bps on the news.
  • Spanish, Portuguese yields drop 5-6 bps.
26 Oct 2020

LONDON: Italian government borrowing costs dropped across the curve on Monday, with short-dated yields falling to a one-year low, after ratings agency S&P Global unexpectedly lifted the country's ratings outlook to stable from negative late on Friday.

The revision of Italy's sovereign outlook offered some unexpected good news for the euro zone's third-largest economy and cements its long-term credit rating at BBB for the foreseeable future.

Investors were worried about the possibility of a near-term downgrade to BBB-, which would have put the country within one notch of a junk rating.

"The S&P move reduces near-term risks of Italy falling below investment grade that would have had implications on BTP holdings by real money accounts and market pricing," said Annalisa Piazza, an analyst at investment manager MFS.

She added that such a downgrade would have made it difficult for the European Central Bank to keep financing conditions under control.

On Monday, the first day of trading after the decision, Italy's benchmark 10-year yields was down 6 basis points at 0.70%. The spread over German bonds tightened to 128 bps.

Short-dated two-year Italian yields hit their lowest level in a year at -0.382% before settling at -0.365% by 1150 GMT, down 3 bps on the day.

The boost comes on a day in which Rome introduced fresh restrictions to try to halt a resurgence of the novel coronavirus that has pushed daily infection rates to records.

The ratings boost is partly predicated on support from the European Union and the ECB. Both institutions have taken unprecedented measures to boost euro zone economies during the COVID-19 pandemic.

Later this week, investors will be looking for clues on a potential further monetary policy boost when the ECB's governing council meets on Thursday.

It is also a busy week for data, with euro zone gross domestic product numbers, inflation and unemployment data all due.

On Monday, Germany's Ifo institute's business climate survey showed that business sentiment in the bloc's biggest economy is being undermined by rising COVID-19 infections.