* S&P cuts Italy one notch to BBB
* Italian yields rise, but remain within ranges
* Spain seen more vulnerable to rating downgrades
By Marius Zaharia
LONDON, July 10 Italian bond yields rose
slightly on Wednesday after a Standard & Poor's downgrade that
raises doubts lower-rated euro zone debt will continue to
outperform safer German Bunds.
S&P cut Italy's rating by one notch to BBB and left its
outlook negative, citing the country's weak economic prospects
and impaired monetary policy transmission within the euro zone.
Italian 10-year yields rose 7 basis points to
4.47 percent, while two-year yields rose 6 bps to
The yield premium paid by 10-year Italian paper over German
debt of the same maturity rose to about 280 bps - some 30 bps
more than this year's low, hit in May, but still 25 bps less
than June's highs.
Analysts said market reaction had been muted as Italy's
ratings remain two or three notches above "junk" grade, meaning
investors have not been forced by their own credit quality rules
to sell. Also, two-thirds of Italian debt is held by a
relatively diverse base of local investors, which tend to hold
onto its bonds.
"The downgrade is a signal we are not ready to outperform
for an enduring period in the periphery," BNP Paribas rate
strategist Patrick Jack said. "But domestic dominance is a clear
support for Italian debt, not only the (extent) of it but also
The premium offered by Italian and Spanish 10-year bonds
over German Bunds has halved in the last year after the European
Central Bank promised to buy government bonds of countries under
market pressure that ask for financial help.
According to Bank of Italy data, banks - which tend to
favour short-dated bonds - held about a fifth of total Italian
debt at the end of September 2012, a much smaller share than in
Spain, where they hold about 40 percent.
But about a quarter of Italian debt is held by local
insurance companies, pension funds, households and corporates.
In Spain, insurance and pension funds, which are more likely to
invest in longer dated debt, hold about 10 percent.
UniCredit strategists said in a note that Wednesday's rise
in yields gave an opportunity to snap up some of the 6.5 billion
euros worth of Italian bonds on offer at an auction on Thursday
Traders said comments on Tuesday by European Central Bank
policymaker Joerg Asmussen indicating the bank would keep rates
low for more than a year, and the release later of minutes of
the Federal Reserve's June meeting were also limiting the market
reaction to the downgrade.
"All the talk from the ECB yesterday is still putting a lid
on spreads and I think there's a lot of wariness about the Fed
minutes as well," one trader said.
CONCERNS ON SPAIN
Rated just one notch above junk by Moody's and S&P, Spain
would be more vulnerable than Italy to a downgrade that would
force investors who only hold investment-grade debt to sell.
Spanish 10-year bond yields were 8 basis points higher at
4.77 percent on Wednesday, while other indebted euro zone
countries' bonds were stable.
"The downgrade illustrates that we haven't reached the
bottom yet (for ratings) and it shows how worried Spain should
be," said Jan von Gerich, fixed income chief analyst at Nordea.
"Spain is more immediately at risk (of forced selling). The
big thing would be if Spain lost its investment-grade status."
Bund futures were 13 ticks higher at 142.69,
getting some support from weak Chinese trade data.