(Updates prices, adds quote)
By Elizabeth Howcroft and Dhara Ranasinghe
LONDON, April 24 (Reuters) - Southern European bond yields fell by about 10 basis points on Friday as markets remained focused on European Central Bank action to mitigate euro zone economic stress and prevent Italy’s credit rating from tumbling into junk territory.
Yields had risen in early trade after Thurday’s European Union summit failed to confirm the size, speed and structure of an emergency fund to help countries to deal with the coronavirus pandemic. With no clear reason for the turnaround, there was suspicion the ECB had stepped in to reverse the blowout in bond yield spreads.
European Union leaders agreed a 1.5 trillion euro rescue package but delayed a decision on the programme’s details until the summer. The other worry is an S&P Global ratings review for Italy later on Friday, with the risk of a one-notch downgrade.
“It seems hard to rationalise because you had the disappointment following the EU meeting,” said Richard McGuire, head of rates strategy at Rabobank, referring to the fall in yields. “Maybe we can blame this composure on ECB intervention.”
The intervention could not be confirmed but two market sources in Italy said they believed that central bank buying of Italian government bonds had been stepped up slightly.
Italy’s 10-year bond yield was down 10 basis points. It touched a four-day low around 1.87%, having risen as high as 2.11% earlier.
Short-dated bond yields, which had jumped as much as 12 bps earlier, eased by 5 bps .
The Italian/German 10-year bond yield spread, which had widened to as much as 256 bps early on Friday, narrowed to 234 bps.
Yields also fell in Spain, Portugal and Greece.
Spain’s 10-year government bond yield slipped 9.5 bps to 0.96%, Portugal’s was down 10.5 bps at 1.10% and Greek 10-year bond yields fell by about 5 bps .
German 10-year bond yields were down about 4 bps as investors sought safety. It was last at -0.47.
Analysts largely expect Italy’s BBB credit rating - just two notches away from junk territory — not to be cut this time despite a deteriorating debt outlook.
Moody’s agency, which reviews Italy on May 8, said on Wednesday that the country’s creditworthiness should remain unaffected given the temporary nature of the downturn and still-low funding costs.
“Based on recent public comments I doubt S&P will downgrade Italy tonight,” ING strategist Antoine Bouvet said, adding that focus had shifted to the ECB.
“The ball is very much in the ECB’s court. It can’t remove the long-term problem, the divergence (between northern and southern euro zone) but it can prevent the long-term problem becoming a short-term one. They are only the ones preventing another euro zone crisis.”
In a sign of the worsening ratings outlook for euro zone sovereigns, Fitch on Thursday cut its outlook on Greece to stable from positive
Elsewhere, the 3-month Euribor rate eased a touch but remained near four-year highs. (Reporting by Elizabeth Howcroft and Dhara Ranasinghe Additional reporting by Sujata Rao Editing by David Goodman)