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Italian bonds set for relief rally as S&P refrains from downgrade


ITALIAN bonds are seen gaining on Monday when European markets open after S&P Global Ratings maintained the country's debt rating.

In a statement released after trading on Friday, the company said that Italy "benefits from credit features that underpin the BBB rating", though it kept a negative outlook, indicating that downgrades are possible. Still, this is likely to bring some respite to Italy's bond market, where the 30-year yield premium over Germany has climbed towards 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 per cent on Friday with the spread over German equivalents at around 261 basis points.

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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 per cent, the highest for similar-maturity securities in the euro area and almost 300 basis points above those in Germany.

The next test for the country'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 per cent during the first quarter, after it contracted 0.1 per cent in the prior three months. BLOOMBERG

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