* Moody’s leaves Italy’s Baa3 credit rating, bonds rally in relief
* S&P upgrades Portugal by one notch, rally gathers momentum
* Portuguese 10-year yield falls to “at least” 25-year lows
* Spanish bond yields also edge down (Updates prices to close)
By Virginia Furness
LONDON, March 18 (Reuters) - No news proved the most important news for euro zone bond markets on Monday after a decision by ratings agency Moody’s not to downgrade Italy sparked a strong rally in Italian debt, while Portuguese yields hit historic lows on an S&P ratings upgrade.
Broader euro zone bond yields dipped in late trade alongside UK gilt yields after the speaker of Britain’s parliament said Prime Minister Theresa May could not put her divorce deal to a new vote unless it was re-presented in a substantially different form.
Moody’s on Friday left Italy’s Baa3 credit rating unchanged, pushing Italian government bond yields to their lowest since May 2018. Standard & Poor’s upgraded Portugal to BBB, allowing Portugal’s 10-year bond yield to drop to its 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 by more than seven basis points on the day to 2.42 percent, its lowest since May 2018. Its spread over higher-rated Germany narrowed to its tightest since September 2018 at 234 basis points.,
Standard & Poor’s cited declining debt and balanced growth for its decision to lift Portugal’s rating
It expects the Portuguese economy to grow 1.5 to 1.7 percent during 2019-2021, record a budgetary surplus and to reduce the ratio of public debt to gross domestic product.
Ten-year Portuguese government bond yields fell to as low as 1.25 percent. They have slid since the European Central Bank announced a further round of targeted long-term financing operations on March 7.
“I bought into the Portugal auction last week,” said David Slater, portfolio manager at Trium Capital. “I think there’s a lot of positive momentum in Portugal.”
Portugal’s 10-year bond yield gap over Germany has narrowed by about 40 basis points since the start of the year and was last at 114 basis points.
The rally in peripheral bonds also helped push Spanish 10-year yields down 4.5 bps to 1.16 percent.
A fall in gilt yields on renewed uncertainty following developments in the UK parliament helped push yields on higher-rated euro zone bonds lower. Germany’s 10-year bond yield was down a basis point at 0.08 percent.
Upcoming supply, however, prevented steeper yield falls.
Euro zone bond supply picks up this week with 19 billion to 24 billion euros of primary activity expected, according to UniCredit analysts. (Reporting by Virginia Furness with additional reporting by Jo Mason and Dhara Ranasinghe; Editing by Mark Heinrich and Kirsten Donovan)