/RATINGS/BTPS: Initial Analyst Thoughts On Moody's Outlook Tweak

Initial analyst thoughts on the back of Moody’s affirming Italy at Baa3 and changing outlook to stable from negative

• Citi: A downgrade from Moody’s to sub-IG is unlikely medium-term, though any weakness in growth and reappraisal of debt/GDP trajectory might increase risks from Fitch/S&P (which rate Italy one notch higher) over coming years. For now, we expect BTP-Bund spread to tighten on the relief and then stabilize into December amid declining BTP supply and potential buybacks.
• Commerzbank: This could take 10y BTP-Bund spreads to the lower end of the 170-240bp range we expect through ‘24. NGEU remains a key factor for both economic growth and future debt dynamics. The risk remains the timely implementation of the National Recovery and Resilience Plan (NRRP). Italy will most likely obtain the next instalment, but according to Bloomberg sources it is falling behind targets.
• Danske Bank: We expect to see a positive reaction in BTPs and a continuation of the spread tightening between Italian government bonds and EU peers, that we have seen since Mid-October, where the 10Y BTP-Bund spread was out at 200bp. Now it is at 170bp, but with the removal of the negative outlook, then we expect the spread to tighten to 150bp before year-end.
• UniCredit: Most of last week’s tightening is likely to reflect beta rather than increasing expectations for a rating improvement, leaving room for some additional performance following Moody’s decision to revise its outlook on Italy to stable. More generally, the improvement of the outlook should remove an important hurdle for demand, especially from foreign investors, opening the door for further spread tightening in the medium term.