Italian, Spanish Bonds Fall After S&P Cuts Italy’s Credit Rating

Italian government bonds declined for a second day after Standard & Poor’s cut the nation’s credit rating, citing a weakening of the country’s economic prospects.

The nation’s 10-year yield climbed the most in a week as the New York-based rating company also referred to the nation’s impaired financial system in its assessment released late yesterday. Spanish 10-year bonds dropped for a fourth day, the longest run of declines in almost two months. Italy’s cost of borrowing for one year rose as it sold 9.5 billion euros ($12.2 billion) of bills due in 367 and 160 days. Germany auctioned two-year notes.

“It’s quite normal that when you get news like that it puts immediate pressure on the market,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. “The rating action reflects an overall picture, that things are still looking weak.”

Italy’s 10-year yield climbed four basis points, or 0.04 percentage point, to 4.45 percent at 4:37 p.m. London time, the biggest increase since July 3. The 4.5 percent bond maturing in May 2023 dropped 0.275, or 2.75 euros per 1,000-euro face amount, to 100.8.

S&P cut Italy’s long-term credit rating to BBB, two levels above junk, from BBB+. The outlook on the rating remains negative, the company said in a statement.

Italy’s economic output in the first quarter of 2013 was 8 percent lower than in the final three months of 2007 and continues to fall, S&P said. The company reduced its growth forecast for 2013 to minus 1.9 percent, from minus 1.4 percent.

Spanish Bonds

Spain’s 10-year yield jumped seven basis points to 4.81 percent, extending the run of price declines to the longest since the period through May 14. S&P rates Spanish debt at BBB-, the lowest investment grade level.

The S&P rating cut for Italy is “worse for Spain” as it puts a spotlight on the country, said Marcus Ashworth, head of fixed income at Espirito Santo Investment Bank in London.

A Spanish government official who briefed journalists on condition of anonymity said Spain isn’t aware of any pending decision to downgrade the country’s credit rating.

Investors often disregard changes in ratings. Yields on sovereign securities moved in the opposite direction from what ratings suggested in 53 percent of 32 upgrades, downgrades and changes in credit outlook last year, according to data compiled by Bloomberg published in December.

Italy Auction

Italy sold 7 billion euros of one-year bills at an average yield of 1.078 percent, up from 0.962 percent when it last auctioned 12-month debt on June 12. It also sold 2.5 billion euros of 160-day securities at 0.599 percent.

The extra yield investors demand to hold Italian 10-year bonds instead of similar-maturity German bunds widened four basis points to 279 basis points. The spread has moved between 243 basis points and 361 basis points this year.

While the rating is “bad news,” markets are “in an environment where investors are searching for yield and there’s a lot of cash in the system, and Italy will continue to benefit,” Danske Bank’s von Mehren said. The spread with Germany may shrink to about 250 basis points this year, he said.

The benchmark 10-year bund was little changed at 1.65 percent after rising to 1.85 percent on June 24, the highest level since April 2012.

Germany sold 4.1 billion euros of two-year notes at an average yield of 0.07 percent, down from 0.18 percent when it last auctioned the securities on June 12. They were sold at a record-low of minus 0.06 percent in July 2012.

Volatility on Austrian bonds was the highest in euro-area markets today followed by those of Portugal and Finland, according to measures of 10-year debt, the yield spread between two- and 10-year securities, and credit-default swaps.

Italian bonds returned 2.6 percent this year through yesterday, according to Bloomberg World Bond Indexes. Spanish securities rose 5.5 percent, while German bunds fell 1.2 percent, the indexes show.

Before it's here, it's on the Bloomberg Terminal.