Spreads To Bunds Tighter As Moody's Upgrade Outlook

Moody's rated Italy at Baa3 (outlook stable) after hours on Friday - upgrading the outlook from negative. The outlook upgrade was a move UniCredit had flagged as having a "non-negligible probability" of occurring. The rating itself was affirmed at Baa3, in line with analyst expectations.

• The 10-Yr BTP/Bund spread has moved tighter this morning as a result, trading 3.1bps tighter at 173.6bps. As noted above, analysts expect further spread tightening in the short term, with Deutsche Bank seeing spreads reach 150bps by year-end.
• The report cited "stabilisation of prospects for the country's economic strength, the health of its banking sector and the government's debt dynamics" as rationale for the upgrade.
• Moody's noted that the impact of the bank windfall tax announced in August would "likely have a limited impact of the system", indicating that "almost all Italian banks have chosen to bolster their capital positions instead of paying the tax".
• Italy's debt trajectory was indicated as "highly sensitive to assumptions on growth, interest rates and the fiscal balance", with Moody's citing the importance of effective implementation of Italy's National Recovery and Resilience Plan in preventing growth from materially weakening.