Spreads To Bunds Tighter As Fitch Affirms Rating

The Italian curve bull flattens at the cash open with yields on cash benchmarks flat to 2bps lower vs Friday's close, after Fitch affirmed Italy's sovereign rating at BBB (Outlook stable) after hours.

• Lack of negative action in recent rating reviews will be easing market concerns r.e. Moody's review this Friday after close - Moody's currently rate Italy one notch above junk at Baa3 (Outlook negative). As noted above, Commerzbank expect "rating agencies to give €-sovereigns the benefit of the doubt in the absence of domestic political shocks", and "do not expect BTPs to lose their IG rating in the foreseeable future".
• Fitch pointed to a broadly stable political position, external finances and banking sector as positives against the weakening fiscal and trend growth outlook.
• They project "public debt/GDP to stabilise in the outer years of our forecast at near the end-2022 level", though "significant loosening of fiscal targets has weakened the deficit adjustment path, with associated risks of higher yields on new debt issuance and non-compliance with EU fiscal rules".
• Like S&P a few weeks ago, they note that the acceleration of NGEU spending will aid growth in 2024/2025, "supported by a reprofiling to rationalise sub-national projects and deliver more through the private sector".
• A key risk is if Italy "enters an Excessive Deficit Procedure after EU fiscal rules come back into force", though the timing of such rules are " currently subject to a very high degree of uncertainty".
• Both S&P and Fitch have now affirmed Italy's rating in recent weeks, which has contributed to around a 20bps tightening in the 10-year BTP/Bund spread since 20 Oct (the day of the S&P decision) - the spread currently trades 2.2bps tighter on the day at 183.3bps.