March 18, 2019 / 8:48 AM / a month ago

No news is good news for Italian bonds as Moody's holds rating

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

By Virginia Furness

LONDON, March 18 (Reuters) - No news proved the most important news in euro zone bonds on Monday after ratings agency Moody’s decided not to downgrade Italy’s credit rating, prompting investors to buy Italian government bonds.

Ratings activity in the periphery was in focus with both Portugal and Italy subject to reviews on Friday. Broader euro zone bond yields were largely unchanged as the market waited for clarity on the UK’s Brexit negotiations and this week’s U.S. Federal Reserve Open Markets committee meeting.

Moody’s on Friday left Italy’s Baa3 credit rating unchanged, helping Italian government bond yields edge back down to their lowest since May 2018. Standard & Poor’s upgraded Portugal to BBB, and the Portuguese 10-year government bond yields fell to their lowest in at least 25 years.

“Portugal was upgraded but even more important was that Moody’s didn’t do anything with Italy’s rating, despite ongoing headlines,” said Sebastian Fellechner, rates strategist at DZ Bank. “The non-ratings decision is helping the market.”

Italy’s 10-year government bond yield fell as much as four basis points on the day to 2.46 percent, its lowest since May 2018. Its spread over higher-rated Germany briefly narrowed to its tightest since September 2018.

Portuguese yields fell after Standard & Poor’s raised Portugal’s BBB- credit rating, citing declining debt and balanced growth.

The ratings agency said it expects the Portuguese economy to grow 1.5 to 1.7 percent during 2019-2021. It also expects Portugal to record a budgetary surplus and to reduce the ratio of public debt to gross domestic product.

Ten-year Portuguese government bond yields edged down to 1.31 percent, having fallen after the European Central Bank announced a further round of targeted long term financing operations on March 7.

The spread of Portuguese 10-year government bonds over Germany has narrowed by about 40 basis points since the beginning of the year.

The upgrade had been widely expected, according to DZ Bank’s Fellechner, which explains the smaller move in Portuguese yields.

Elsewhere, French 10-year government bond yields were largely unchanged after more violence linked to the yellow vest movement. France’s prime minister is due to announce new security measures.

Supply is also due to pick up this week with 19 billion to 24 billion euros of primary activity, according to UniCredit analysts who say this will likely be the heaviest week in 2019. (Reporting by Virginia Furness, editing by Larry King)

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