Sovereign Credit Rating Situations Promote Peripheral Tightening

Friday’s sovereign rating announcements promote tightening in the European periphery, before a move away from session highs in equity markets limits the move.

• A reminder that S&P chose not to provide an update on Italy, even in light of the well-documented recent Italian fiscal headwinds. The lack of outlook movement/warning has removed any residual pricing of such an outcome.
• BTPs tighten by ~2.5bp vs, Bunds, last trading ~140bp over their German counterpart.
• Meanwhile, S&P revised Greece’s outlook to positive on the back of “ongoing debt stock reduction,” affirming their BBB- rating.
• The agency noted that “despite some recent softening in economic data, Greek economic growth has outperformed the eurozone average, a trend we expect will continue.”
• “Greece's previously very large net debt-to-GDP ratio is falling and should continue to do so if our expectation for fiscal discipline and relatively strong nominal GDP growth plays out.”
• They went on to suggest that they could raise Greece’s rating within the next 24 months if “Greece's net government debt-to-GDP ratio falls further to approach peer sovereign levels” flagging a potential path to achieving that goal.
• GGBs tighten by ~1.5 to Bunds, printing ~104bp over the German benchmark.
• Both BTP/Bund & GGB/Bund 10-Year spreads hold to their recent ranges.
• GGB yields are still a little higher on the day given broader core global FI moves.