December 8, 2014 / 8:53 AM / 3 years ago

Italian bond yields rise after S&P credit ratings cut

* S&P cuts Italy credit rating to one notch above junk

* Italian bonds underperform euro zone peers (Updates with details, analyst comments)

By Emelia Sithole-Matarise

LONDON, Dec 8 (Reuters) - Italian bond yields bounced off record lows on Monday after Standard & Poor’s delivered a blow to Prime Minister Matteo Renzi’s reform plans by cutting the country’s credit rating to just one notch above junk.

In a move that surprised analysts late on Friday, S&P downgraded Italy’s rating to BBB- from BBB, saying weak growth and poor competitiveness undermined the sustainability of its huge public debt.

At the same time, the agency raised Ireland’s rating to A from A-, rewarding the former bailout recipient for what it said was solid economic growth, improving employment and a debt reduction path that stands out in the euro zone.

As recently as June S&P had confirmed Italy’s BBB rating. The downgrade is a setback for Renzi, who came into office in February promising an ambitious reform agenda to lift Italy out of recession but has seen the economy continue to shrink.

Italian 10-year yields rose 8 basis points to 2.03 percent , bouncing off a record low of 1.915 percent plumbed on Friday as the market focused on the possibility of the European Central Bank buying sovereign bonds in a programme of quantitative easing. The ECB has indicated a decision will be taken early next year.

The S&P statement came after European markets had closed.

“S&P had already this negative outlook on Italy ... However, it was still a surprise, given it was the first downgrade of a periphery country in more than a year,” said Daniel Lenz, a market strategist at DZ Bank.

“Italy is underperforming strongly ... because of this news and this may last for a couple of days but then we will (still) have this issue of QE which might outweigh everything else again.”

Yields on other lower-rated euro zone bonds followed Italian peers higher but more modestly. Spanish and Portuguese 10-year yields edged 3 bps higher to 1.84 percent and 2.79 percent respectively, both off historic lows.

Irish equivalents were 1.5 bps down at 1.38 percent . German yields, the yardstick for euro zone borrowing costs, were a touch lower at 0.77 percent. (Editing by Gareth Jones)

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