EURO GOVT-Italian rating downgrade underpins German Bunds

LONDON, March 11 Mon Mar 11, 2013 3:23am EDT

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LONDON, March 11 (Reuters) - German Bund futures rose on Monday after a downgrade by Fitch to Italy's credit rating dented appetite for Italian bonds in favour of safe-haven assets.

Fitch lowered Italy's sovereign rating by one notch to BBB-plus, with a negative outlook, due to the political uncertainty after inconclusive elections.

Markets have shown more resilience than expected to a political deadlock in Italy, but the downgrade could add to Italy's woes as it seeks to raise funds later this week.

German Bund futures were up 24 ticks on the day at 142.71 but were little changed from after-hour trading levels hit on Friday. Italian BTP futures fell.

"They (Fitch) are only playing catch up with the others," one trader said, referring to the fact that Standard & Poor's already rates Italy BBB-plus and Moody's rates the country Baa2. Both ratings carry negative outlooks.

"But we remain negative on Italy. We still think the market is too complacent on Italy, so we are still looking for the 10-year yield spread to widen versus Bunds," the trader added.

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