* Italy yields hover above record lows
* Lower-rated bonds, stocks struggle
* Market awaits Spain rating announcement
(Adds fresh quotes, updates prices)
By John Geddie
LONDON, April 25 Italian bond yields hovered
just above record lows on Friday, underpinned by a ratings
outlook lift from Fitch as concerns about Ukraine prompted
investors to pull out of lower-rated paper.
Viewed as one of the riskiest investments at the height of
the euro zone crisis, bonds issued by Rome have become an
increasingly popular bet as the country's economy has started to
recover and returns on core euro zone debt continue to flirt
with historic lows.
Italian 10-year yields dipped 1 basis point to
3.11 percent in early trading, just above the record low of 3.07
percent hit last week.
"It is a reminder that the world has changed its mind about
periphery," said Luca Jellinek, European head of fixed income at
Spanish debt - which tends to track its Italian equivalent -
also held its own, as did euro zone benchmark German Bunds.
But lower-rated bonds, global stocks and currencies
struggled after Ukrainian forces killed up to five pro-Russia
separatists and Russia conducted military drills near the
border, raising fears it was gearing up to invade.
Emerging from recession at the end of last year, Italy has
benefited from a vast improvement in financing conditions. Fitch
pointed out that its average issuing yield in the first quarter
or the year was 1.6 percent, a historic low.
Fitch, which already rates Italy one notch above the other
two main agencies Standard and Poor's and Moody's, affirmed the
country at BBB+, raising its outlook to stable from
Italy sold 5 billion euros at auction on Thursday, hitting
nearly 40 percent of its annual funding target.
"Italian bonds are not traded as a credit any more, but more
on the (Central Bank) rates outlook like German Bunds," said one
government bond trader.
Bunds rallied 3 bps to hit 1.51 percent, while
yields on Greek bonds - the highest in the bloc - rose 14 bps to
With official interest rates already at historic lows, the
European Central Bank has raised the prospect of loosening its
monetary policy further, encouraging investors to buy peripheral
Some think that yield levels are becoming too rich.
"We have been, and remain overweight in the euro periphery,
though our sense is that we have now witnessed the majority of
the rally," said Mark Dowding, a senior portfolio manager at
BlueBay, one of Europe's largest bond funds.
But others see little resistance to more declines,
especially with the ECB raising the possibility of a programme
of asset purchases known as quantitative easing.
"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 dipped 1 bp to a day's low of 3.07 percent,
as markets also awaited a scheduled ratings update from Fitch in
Fitch has tended to announce ratings actions before the
markets open, but also has the option of waiting until after the
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, John Stonestreet)