By Abhinav Ramnarayan
LONDON, Oct 26 (Reuters) - Italian government bond yields dropped across the curve to one-week lows on Monday after ratings agency S&P Global unexpectedly lifted the country's ratings outlook to stable from negative late on Friday.
The revision of Italy's sovereign outlook offered some unexpected good news for the euro zone's third-largest economy and cements its long-term credit rating at BBB for the foreseeable future.
Investors were worried about the possibility of a near-term downgrade to BBB-, which would have put the country within one notch of a junk rating.
"The revision should return (Italian) BTPs to strength after the last few weeks of grinding weakness," Mizuho strategists said in a note, adding that a mixed outlook for high-grade corporate debt could also fuel a move towards Italian bonds.
On Monday, the first day of trading after the decision, Italy's benchmark 10-year yields fell 9 basis points to 0.68% IT10YT=RR. The spread over German bonds tightened to 126 bps. DE10IT10=RR
The boost comes on a day in which Rome introduced fresh restrictions to try to halt a resurgence of the novel coronavirus that has pushed daily infection rates to records.
The ratings boost is partly predicated on support from the European Union and the European Central Bank. Both institutions have taken unprecedented measures to boost euro zone economies during the COVID-19 pandemic.
As a result, other southern European government bonds were also in demand on Monday. Spanish and Portuguese 10-year yields dropped 5 to 6 basis points. ES10YT=RR, PT10YT=RR
Later this week, investors will be looking for clues on a potential further monetary policy boost when the ECB's governing council meets on Thursday.
It is also a busy week for data, with euro zone gross domestic product numbers, inflation and unemployment data all due. EM
Germany's Ifo Institute releases its business climate index on Monday at 0900 GMT.
(Reporting by Abhinav Ramnarayan, editing by Larry King)
((Abhinav.Ramnarayan@thomsonreuters.com; 0044 751 745 1044;))
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