February 17, 2014 / 8:30 AM / 4 years ago

REFILE-Italy yields fall further as Moody's lifts ratings outlook

* Italy 10-year yields within sight of 8-year lows

* PD leader Renzi poised to lead new government

* Moody’s move on ratings outlook adds to firm tone

By Emelia Sithole-Matarise

LONDON, Feb 17 (Reuters) - Italian bond yields fell near eight-year lows on Monday after ratings agency Moody’s lifted its outlook on the country’s credit rating to “stable” from negative as Rome prepared for a new government.

The move late on Friday came after centre-left leader Matteo Renzi led the ouster of party rival Enrico Letta last week, a move largely welcomed by investors encouraged by Renzi’s pledge for a more ambitious government.

Moody’s said in a statement it had improved its outlook on the euro-zone’s third largest economy on the back of Italy’s resilient financial strength, sinking funding costs and diminished risk the state may have to use resources to help recapitalise its banks. It affirmed its rating at Baa2.

Italian bonds extended last week’s rally, pushing yields near their lowest since early 2006 and reversing some of their underperformance of Spanish peers.

“The Moody’s upgrade to a stable outlook is good news in its own right ... The market overall has been resilient to recent political uncertainty,” said Chris Clark, a strategist at ICAP.

“The broad consensus is that a Renzi administration would have both the ability and willingness to drive economic reforms through parliament and all that is seen as broadly positive for Italy.”

Italian 10-year yields were 4 basis points down at 3.64 percent, taking them just 2 bps shy of lows last seen in February 2006, according to Reuters data. They have fallen around 15 basis points since late last week when the centre-left leadership forced Letta to resign after 10 months as prime minister.

Renzi, who has promised radical reforms to get the country out of an economic quagmire characterised by public debt equivalent to 130 percent of total economic output and the highest unemployment since the 1970s, is expected to be named prime minister on Monday.

Moody’s expects Italy’s debt-to-GDP ratio to peak this year at below 135 percent and said Letta’s exit and expectations Renzi will head a new government did not change its forecasts.

“We do not expect a reversal of the current positive momentum for the Italian debt market, and any progress on the reform agenda is likely to strengthen the market sentiment,” Barclays Capital strategists said in a note.

At the euro zone’s core, German Bund futures were 22 ticks down at 143.38 ticks as a firmer tone in riskier assets such as equities following a stabilisation in emerging markets cooled demand for safe-haven bonds.

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