Italian bond yields dip after Fitch raises ratings outlook

LONDON, April 25 Fri Apr 25, 2014 3:45am EDT

LONDON, April 25 (Reuters) - Italian bond yields dipped on Friday, hovering above record lows, after ratings agency Fitch raised its outlook on the country.

Italy, once at the forefront of the euro zone debt crisis, emerged from recession at the end of last year and is enjoying much improved market conditions, Fitch said. The country has already issued around 40 percent of its annual funding target this year following a 5 billion euro auction on Thursday.

"It is a reminder that the world has changed its mind about periphery," said Luca Jellinek, European head of fixed income at Credit Agricole.

Fitch affirmed Italy's sovereign rating at BBB+, raising its outlook to stable from negative. Fitch already rates Italy one notch above the other two main agencies, Standard and Poor's and Moody's, which deem it to be BBB (negative) and Baa2 (stable), respectively.

Italian 10-year yields fell 1 basis point to 3.11 percent, just above the record low of 3.07 percent hit last week.

The prospect of further European Central Bank monetary policy easing is prompting investors to buy peripheral debt, although some strategists think that mixed messages from policymakers on a possible asset purchase programme, known as quantitative easing (QE), is likely to cap a further fall in yields.

"It is questionable whether yields can fall lastingly below 3 percent at a time when ECB QE expectations are being re-assessed," said Markus Koch, an analyst at Commerzbank.

Others see little resistance to more declines, however.

"We have been, and remain, in a clear tightening trend, and a lot of that is based on the assumption that any quantitative easing is favourable," said Jellinek at Credit Agricole.

Spanish yields, which tend to track Italy's, were unchanged on Friday, as markets waited to see whether Fitch would act on a ratings announcement also scheduled for Friday.

Spain, like Italy, has enjoyed much improved market access in 2014. It has completed more than 40 percent of its funding programme already, paying record low costs to borrow 5.6 billion euros at auction on Thursday.

In further evidence of ratings agencies taking a more positive view on the periphery on Friday, both Fitch and Standard and Poor's lifted Cyprus less than a year after the country was bailed out.

S&P raised Cyprus' rating to B from B-, with a positive outlook. Fitch affirmed Cyprus' B- rating, raising its outlook to stable from negative. (Editing by Sonya Hepinstall)

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