* Italian yields hover above record lows
* Lower-rated bonds, stocks struggle
* Fitch upgrades Spain, lifts Italy outlook
(Updates with Spanish rating upgrade)
By John Geddie
LONDON, April 25 Italian bond yields held just
above record lows on Friday after Fitch upgraded Italy's ratings
outlook, as concern about Ukraine prompted investors to pull out
of lower-rated paper.
Spanish debt also held its own throughout the day. Fitch
lifted Spain's rating by one notch to BBB+, with a stable
outlook after the market close.
At the height of the euro zone crisis, bonds issued by Italy
and Spain were considered among the riskiest investments
available. Now they are an increasingly popular bet as the two
economies have started to recover and the returns on core euro
zone debt remain near historic lows.
Italian 10-year yields dipped 1 basis point to
3.11 percent, just above the record low of 3.07 percent hit last
week. Spanish yields fell 1 bps to 3.06 percent
"It is a reminder that the world has changed its mind about
periphery," said Luca Jellinek, European head of fixed income at
In contrast, lower-rated bonds, such as Portugal's and
Greece's, 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 negative
Italy sold 5 billion euros of debt 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.
Bund yields fell 5 bps to hit 1.48 percent,
while yields on Greek bonds - the highest in the bloc - rose 10
bps to 6.26 percent.
With official interest rates already at historic lows, the
European Central Bank has raised the prospect of loosening its
policy further, encouraging investors to buy peripheral debt.
Some think yields are too low.
"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.
"In an environment where, rightly or wrongly, you have
ongoing speculation of further ECB action down the line,
investors are reaching out for the highest levels of yield you
can get in the euro zone," ICAP strategist Philip Tyson said.
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 upgraded 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.
(Additional reporting by Marius Zaharia Editing by Larry King
Editing by Jeremy Gaunt)