March 23, 2018 / 12:04 PM / 6 months ago

UPDATE 2-Spanish bond yields hits 15-month lows as second "A" rating looms

* S&P Global could follow Fitch with Spain upgrade to A-

* Spanish yields closer to Ireland and France than Italy

* Geopolitical, Italian election concerns weigh on market

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices, adds ECB)

By Abhinav Ramnarayan

LONDON, March 23 (Reuters) - Spanish government bond yields were at their lowest in over a year ahead of a potential ratings upgrade later on Friday that would take Spain’s credit rating firmly into single A territory and further ahead of its peripheral peers.

S&P Global is set to review its rating on Spain after the market close, and analysts expect an upgrade from BBB+ to A-, after a similar move from Fitch earlier this year.

This would move Spain further away from its main peer Italy and towards better-rated euro zone countries such as Ireland, Belgium and France, referred to as “semi-core” countries.

“This would put Spain back into the average single-A bucket for most indices, opening a larger investor base and underscoring the convergence momentum with semi-core,” Commerzbank analysts said in a note.

Spanish 10-year government bond yields hit a fresh 15-month low of 1.265 percent, down 2 basis points on the day on Friday. They’ve fallen for the last four straight weeks, down 10 basis points alone this week.

The Spanish/Italian 10-year bond yield spread was at 61 bps, which is historically high, even if it is not quite as wide as it was earlier this year.

Spain’s 10-year borrowing costs are now closer to that of Ireland - the spread between the two is 31 basis points - while the Spain/France 10-year bond yield spread is 50 bps. ,

“You might get some investors such as bank treasuries who can only invest in single A credits so you could get some inflows,” said ING strategist Benjamin Schroeder, though he warned against overstating this trend.

“Italy-Spain has been the traditional pair, so it’s difficult to see them fully detaching. So Spain will still be affected by Italian politics and so on,” he said.

He pointed to some weakness in Spanish and Italian bonds this week on concerns over the formation of the new Italian government as an example of this.

Italy’s parliament met for the first time on Friday after a national election earlier this month left no group with any clear majority and as talks between political rivals stalled.

The market is also weighed down by geopolitical concerns with the possibility of a trade war and U.S. President Donald Trump’s appointment of a hawkish national security adviser worrying investors.

Trump shook up his foreign policy team again on Thursday, replacing H.R. McMaster as national security adviser with John Bolton, a hawk who has advocated using military force against North Korea and Iran.

In Europe, benchmark issuer Germany’s 10-year bond yield hovered close to 10-week lows struck a day earlier at around 0.52 percent. It was set for its biggest two-week drop since August, down 12 bps.

Elsewhere, the European Central Bank said on Friday it had raised a cap on how many bonds it can lend to investors against cash, boosting a tool that has helped ease a drought in sought-after government paper.

The ECB is now prepared to lend out government bonds bought as part of its stimulus programme against collateral worth up to 75 billion euros ($93 billion), up from 50 billion euros previously.

Reporting by Abhinav Ramnarayan, Additional reporting by Fanny Potkin, Dhara Ranasinghe, Editing by XX

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