August 12, 2019 / 10:28 AM / 13 days ago

UPDATE 2-Italian bond yields fall on ratings relief, hurdles to snap election

* Fitch maintains Italy rating at BBB

* Hurdles emerging to League’s plans to push for snap elections

* Italian bond yields fall, stocks rise

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates pricing)

By Dhara Ranasinghe

LONDON, Aug 12 (Reuters) - Italy’s 10-year bond yield fell from five-week highs on Monday on relief that the country’s credit rating was left unchanged by Fitch Ratings and hurdles emerged to League chief Matteo Salvini’s calls for an early election.

Fitch on Friday maintained Italy’s sovereign credit rating at ‘BBB’ and its outlook at negative, citing a high level of government debt, low-trend economic growth, policy risk and political uncertainty.

A plan by the far-right League to call a no-confidence vote in the government - of which it is a part - and force an early election also appeared to face mounting resistance from other parties. Their support would be needed in parliament to pass any no-confidence motion.

That helped spark a 5-9 basis points fall in Italian yields .

Former Democratic Party (PD) leader Matteo Renzi, who still wields strong influence over his centre-left party, said on Sunday that holding an election now, just when the government is due to start preparations for the 2020 budget, would be “crazy”.

“Fitch kept Italy’s rating unchanged and some market participants may be betting that a snap election could be delayed,” said DZ Bank rates strategist Sebastian Fellechner, referring to Monday’s yield falls. “We expect snap elections will take place even if they are delayed.”

Italy’s 10-year bond yield fell some 9 bps to 1.73% , below five-week highs hit on Friday when it posted its biggest one-day jump since a bond market rout in May 2018.

Still, in a sign of investor unease, the closely-watched Italian/German 10-year bond yield gap stood at 231 bps — near the 239 bps high hit on Friday.

Salvini is pushing for a no-confidence vote this week to bring down the government it formed with the 5-Star Movement (5SM) last year, while opposition parties would prefer to wait until Aug. 19-20. The decision lies with the heads of political groups in the Senate, who will meet on Monday to set a timetable.

“At this stage, we believe early ballots in Q4 remain the most likely end-game of the latest Italian government crisis,” said Barclays analyst Fabio Fois in a note.

“However, we think the odds of an alternative grand coalition being formed have increased notably as it now seems clear that factions of PD and 5SM parties are willing to avoid snap elections and install a grand coalition government.”

The uncertainty could hurt Italian bonds, which have seen strong inflows thanks to relatively higher yields. Japanese investors bought Italian bonds in June at the fastest pace in more than four years.

Most other euro zone bond yields inched down, reflecting worries about global trade wars and recession risks. Germany’s Bund yield dipped to -0.59%, near recent record lows.

Reporting by Dhara Ranasinghe; editing by John Stonestreet and Ed Osmond

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