Standard & Poor's (S&P) has downgraded Spain's long-term credit rating by two notches from "BBB+" to "BBB-" with a negative outlook and also cut the short-term rating to "A-3" from "A-2" citing 'mounting risks to Spain's public finances, due to rising economic and political pressures.'

In a context of deepening economic recession, including rising unemployment and spending constraints, the S&P analysts feel that the country has a limited number of policy actions.

The downgrade moves the rating on Spanish debt to a level just above junk status. Rival ratings agency Moody's has said it expects to decide this month whether it will cut the country's bond ratings to non-investment grade.

The upshot in the bonds market was that the yield on the benchmark 10-year treasury bond declined to 5.76% from around 5.80% overnight, suggesting that the move had been more than built in to the price of bonds.

That decline in yields paled in comparison with the almost nine basis points fall in the yield of the Italian 10-year note, which now barely yields more than 5%.

Italy sold €3.75bn of debt dated July 2015 this morning, the maximum amount it had targeted. Demand exceed supply by a factor of 1.67, up from 1.49 at the previous auction.

S&P downgraded Italy's credit rating on Wednesday by two notched to BBB-, with a negative outlook.

Elsewhere, yields on 10-year government debt generally edged higher.

JH

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