Germany's 10-year bond yield was up 3 basis points (bps) at 2.25% and was set to close the week down 5 bps. Germany's 2-year yield , most sensitive to expectations about policy rates, was up 4 bps at 2.62%, after falling 0.5 bps so far this week. After recent remarks from ECB officials, investors were inclined to rely on French policymaker Francois Villeroy de Galhau, who said on Wednesday the ECB had nearly completed its campaign to raise interest rates and further hikes would be "more marginal".
Money market bets on future rate hikes rose slightly during the week. The September 2023 ECB euro short-term rate forward was at 3.61%, implying expectations for an ECB deposit facility rate of 3.7% by autumn. Italy's 10-year government bond yield was up 2 bps to 4.14% and was set to end the week down 6 bps. The spread between Italian and German 10-year yields -- a gauge of investor sentiment towards the euro zone's more indebted countries – was at 188.5 bps, showing a weekly tightening of 3 bps. Markets were not concerned by Fitch's review of Italy's sovereign rating, due later in the session. Some analysts expect the rating agency to confirm its assessment - BBB with stable outlook - while flagging risks related to growth weakness in the medium-term and high public indebtedness at a time of increasing interest rates.
But according to Citi, "Italy is at risk of another negative
outlook from Fitch," which could mean 10 bps of knee-jerk
widening of the Italian-German yield spread.
Citi analysts argued that such a move would increase the
sensitivity of peripheral bonds - those of Italy, Spain,
Portugal and Greece - to downside triggers, which may come from
further ECB quantitative tightening acceleration or weakening
economic growth.
"While the stable outlook of the BBB-rating appears to be at
risk, not least after Fitch's negative rating action on France a
couple of weeks ago, it seems more likely that Fitch skips the
Italian review this week," said Christoph Rieger, head of rates
and credit research at Commerzbank.
"More relevant will be Moody's review next week, where any
negative rating action would lead to a junk rating," he added.
Fitch cut France's sovereign credit rating by one notch to
'AA-', saying fiscal metrics are weaker than its peers, and it
expects government debt/GDP to remain on a modest upward trend.
(Reporting by Stefano Rebaudo, additional reporting by Dhara
Ranasinghe; editing by Sonali Paul)
