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EURO GOVT-Italian debt underperforms after Fitch downgrade
March 11, 2013 / 5:21 PM / in 5 years

EURO GOVT-Italian debt underperforms after Fitch downgrade

* Italian bonds fall after Fitch downgrade

* German Bunds benefit from Italian backdrop

* Some analysts say markets too complacent on Italy

By Marius Zaharia and Ana Nicolaci da Costa

LONDON, March 11 (Reuters) - Italian government bonds underperformed other euro zone debt on Monday after Fitch cut the country’s credit rating, but the move was contained by the U.S. economic outlook and investors hunting for yield.

Markets are split on the outlook for Italian bonds. Some analysts say the European Central Bank’s so far untested bond-buying programme will protect them against a sell-off, while others say a political deadlock there could eventually bring it to the forefront of the euro zone crisis again.

Fitch’s one-notch downgrade to BBB-plus with a negative outlook pushed 10-year Italian yields 7 basis points higher on the day to 4.66 percent, well below highs of just under 5 percent hit at the end of February.

“The market is fairly OK with the downgrade. (Italian bonds) have shown quite a lot of resilience. These are fairly good levels for what’s going on in Italy,” said David Schnautz, rate strategist at Commerzbank in New York.

“We still have no clear guidance over how the situation will evolve over the next weeks, months, maybe quarters on the policy front. It is not the time to expect any structural reforms out of Italy.”

Commerzbank turned negative on Italian bonds after the February elections produced a hung parliament but closed its selling recommendations last week because “we didn’t want to stand in front of the train any more,” Schnautz said.

Traders said many investors who sold Italian debt prior to or after the elections were coming back to the market as yields became more attractive. Yield-hunting has been a feature of euro zone bond markets for much of this year, with investors encouraged by upbeat U.S. data and the ECB’s backstop.

“(Investors) are confident on the overall effectiveness of the ECB’s safety net,” Ricardo Barbieri, strategist at Mizuho said, pointing to the subdued reaction of Spanish bond markets to the political crisis in Italy.

Spanish 10-year bonds have mostly outperformed Italian debt since the elections with the 10-year yield spread between them hitting its narrowest since March 2012 at 8 bps, a tenth of the gap at the beginning of the year.

Data on Friday showing U.S. employers added a greater-than-expected 236,000 workers to their payrolls in February also prevented a deeper sell-off in Italian debt and other high-yielding assets.


The appetite for Italy’s debt will be tested again at a sale this week. Despite the downgrade, analysts expect yield-hungry investors to post solid bids for the bonds as they have done at recent Italian and Spanish bond auctions.

“I am sure it will go relatively well,” Cyril Regnat, fixed income strategist at Natixis said.

But he said optimism towards lower-rated debt was overdone.

“The market is probably too optimistic regarding Italy and even more regarding Spain,” he said.

“Italian and Spanish debt are really expensive. We would wait to enter longer positions on both debt - right now, it’s too risky given these uncertainties on the political side.”

Safe-haven German Bund futures were up 21 ticks on the day at 142.67, while 10-year cash yields were 1.8 basis points lower at 1.508 percent.

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