Bonds News

UPDATE 3-Italy bond yields up before Fitch review, trade worries push Bund yields down

* Fitch to review Italian ratings on Friday

* German Ifo, January euro zone inflation out

* ECB’s Draghi scheduled to speak later in day

* Euro zone periphery govt bond yields (Updates prices)

LONDON, Feb 22 (Reuters) - Italian government bond yields rose on Friday, reflecting caution among investors before a Fitch ratings review.

Yields in broader euro zone debt markets fell, pushed down by a weak German business sentiment survey and concerns about U.S./European trade tensions.

Germany’s 10-year bond yield was back below 0.10 percent and set for its biggest daily drop in two weeks. In contrast, Italian bonds underperformed and their yields rose by between 6 and 8 basis points .

Analysts said that while it was premature to expect a downgrade of Italy’s credit rating on Friday, a deteriorating economic outlook had raised concerns about the ratings outlook.

“There’s enough goodwill following the budget deficit agreement with the EU last year to not downgrade Italy this time,” said Ross Hutchison, rates portfolio manager at Aberdeen Standard Investments.

“My base case is that they keep that rating as is, with a negative outlook.”

Fitch rates Italy BBB, two notches above the dividing line that separates investment grade bonds from non-investment grade territory.

Moody’s will review Italy ratings in March, S&P Global in April.

Italy’s economy slipped into recession at the end of last year and many economists have downgraded their 2019 growth forecasts, raising concern about a weak fiscal position and the country’s longer-term ratings outlook.

“The worsening of the macro landscape in Italy raises the prospect that rating agencies could lower the rating or outlook assigned to Italian government bonds,” Goldman Sachs analysts said in a note this week.


Even a modest increase in the probability of a rating downgrade should not be underestimated, Goldman said, because decisions by ratings agencies can shift demand for developed market bonds when a rating approaches the threshold between investment grade and high yield.

Italian two-year bond yields were last up 7 bps on the day at 0.54 percent. Ten-year yields rose 4 bps to 2.87 percent , pushing the gap over German Bund yields to 276 bps versus 269 bps late Thursday.

German 10-year Bund yields fell to 0.097 percent , holding lower after a fall in the closely watched Ifo business sentiment index.

The Ifo economic institute said its business climate index fell to 98.5, the lowest level since December 2014, suggesting company executives expect growth in Europe’s biggest economy will continue to lose momentum.

The yield fall in safer government bonds gathered pace after a Bloomberg report said the European Union is drafting a retaliatory tariff list that includes U.S. firms Caterpillar and Xerox, if U.S. President Donald Trump imposes tariffs on European cars.

French and Dutch 10-year bond yields were down about 3 bps each, while British gilt yields fell 4 bps .

“We are moving from one trade war to another,” said Mizuho rates strategist Antoine Bouvet. “As the talks with China near an end, the fear in the market is that the U.S. will turn its attention to the EU.”

Reporting by Dhara Ranasinghe Editing by Toby Chopra and David Holmes