LONDON, April 27 (Reuters) - Italian government bond yields dropped on Monday after S&P Global left the country’s credit rating unchanged late on Friday, calming worries about a potential junk rating for the euro zone’s third largest economy.
Many analysts expect Italy’s already-high debt to soar to around 150% of gross domestic product as it grapples with the economic damage caused by the spread of the novel coronavirus.
Concerns were mounting that it would also lose its investment-grade status along the way, potentially pushing its debt costs far higher.
But S&P Global on Friday affirmed Italy’s credit rating at ‘BBB/A-2’ — two notches above junk — saying that the country’s diversified and wealthy economy and net external creditor position partly offset a drag from high public leverage.
“It diminishes the risk of investors dashing out of Italian bonds in case of a downgrade into junk, particularly as the next potential reviews are three or six months down the line,” said ING rates strategist Antoine Bouvet.
But he added that in the longer term, it’s hard to see how Italy can keep its current rating level as debt rises.
“They are very much dependent on ECB rates remaining low for the foreseeable future,” he said.
Italy’s benchmark 10-year bond yields was 13 basis points lower at 1.75% on the first day of trading after the decision, while the spread over Germany dropped to its tightest level in over a week, at 218 bps.,
German 10-year bond yields, the benchmark for the region, were flat at -0.47%.
Short-dated Italian debt yields also fell, with two-year yields lower 14 basis points at 0.73%.
Other Southern European bonds also benefited from the relief over Italy. Spanish and Portuguese 10-year yields dropped around eight basis points each.,
That said, market gauges are starting to reflect the risk that another existential crisis may be building for the euro zone. That puts pressure on the European Central Bank to keep stimulus flowing and debt-financing costs within sustainable levels.
The central bank is due to meet later this week, and market participants will be watching for any indication on what more it will do to help the euro zone economy through the coronavirus crisis. (Reporting by Abhinav Ramnarayan; editing by Tommy Reggiori Wilkes, Larry King)