Italy Bonds Set for Relief Rally as S&P Refrains From Downgrade

(Bloomberg) -- Italian bonds are seen gaining Monday when European markets open after S&P Global Ratings maintained the nation’s debt rating.

In a statement released after trading on Friday, the company said Italy “benefits from credit features that underpin the BBB rating," though it kept a negative outlook, indicating that downgrades are possible. Still, this will likely bring some respite to Italy’s bond market, where the 30-year yield premium over Germany has climbed toward levels seen during last year’s market turmoil.

“I think this is the correct view as there is no point for the rating agency in being forward-looking and downgrading Italy on the deterioration of Italy’s economy and finances before hard data start pouring in,” said Antoine Bouvet, a strategist at Mizuho International Plc. “Since no downgrade was expected or priced, I don’t think it will go beyond a short-lived relief rally.”

Italy’s 10-year bond yield closed at 2.58 percent Friday with the spread over German equivalents at around 261 basis points.

Investor Demands

Investors have been demanding a higher premium to hold the nation’s long-term debt in recent weeks, as its weakening economy pushed the populist government to raise its budget deficit estimate to levels deemed to be in breach of European Union rules. Italian 30-year yields have climbed 13 basis points this month to 3.60 percent, the highest for similar-maturity securities in the euro area and almost 300 basis points above those in Germany.

The next test for the nation’s bonds will come with a crucial gross domestic product reading on Tuesday, which could confirm the country’s recession. Analysts surveyed by Bloomberg expect GDP to have risen by 0.1 percent during the first quarter, after it contracted 0.1 percent in the prior three months.

James Athey, a senior investment manager at Aberdeen Asset Management Plc who has been keeping a short position in Italy’s 10-year bonds, anticipates yields retreating by about 10 basis points following the S&P decision to keep the rating unchanged.

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