Investors pile into Italian bonds after Moody's reprieve

[August 21, 2018]  By Abhinav Ramnarayan

LONDON (Reuters) - Italian government bonds rallied on Tuesday after Moody's extended the deadline for its review of the country's rating, providing some relief for investors who expected a downgrade imminently.

Moody's, which last month placed Italy's "Baa2" rating on a review for a downgrade, said it was pushing back its decision to gain "greater clarity on (Italy's) fiscal path and reform agenda".

"The Moody's review is part of the reason why we have a good performance from Italy," said Natixist bond strategist Jean-Christophe Machado. "It also helps that risk appetite has come back this week."

He warned, though, that Italy's budget, set to be decided in October, could affect the country's rating if the anti-establishment government announces high spending measures that put it on a collision course with European Union rules.

That said, the postponement also gives investors more time to take advantage of the extra yield Italy is offering, said ING strategist Martin Van Vliet.

Accordingly, Italy's 10-year government bond yield dropped nine basis points to 2.96 percent, dipping below 3 percent for the first time since Aug. 10 <IT10YT=RR>.

It is also down 16 bps so far this week, its biggest two-day fall in two months.

The closely watched Italy/Germany bond yield spread, meanwhile, is 12 bps tighter on the day at 263 bps.

The improvement in risk sentiment referred to by Machado of Natixis has mostly come as expectations grew for better trade relations between United States and China, with officials from the two countries set to meet this week for talks.

European stock markets rose for a second day in a row <.STOXX> and other southern European debt also gained, with Portuguese and Spanish 10-year yields lower 5 to 6 bps.

Accordingly, safe-haven euro zone government bond yields rose on the day. Germany's 10-year government bond yield, the benchmark for the region, was up 2 bps at 0.32 percent.

This may be also because of an upcoming auction of 10-year German debt due on Wednesday.

On Tuesday, the euro zone's largest economy sold over 3 billion euros ($3.43 billion) of two-year "Schatz" debt.

(Reporting by Abhinav Ramnarayan; editing by David Stamp, Larry King)

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