HSBC sees value in three-year Italian bonds, expects market friendly budget

LONDON (Reuters) - HSBC said on Friday that it see further gains in Italian bonds, especially shorter-dated ones, given expectations for a relatively market-friendly budget.

Reassuring comments from top Italian politicians that they will respect EU budget rules on fiscal discipline when it comes the 2019 budget have bought some stability to Italy's government bond market, with yields set for a second straight week of falls.

"We think the BTP rally could extend further, despite a 60 basis point fall in short-end yields," HSBC analysts said in a note published on Friday.

They said the market was coming around to the view that Italy's budget deficit will not be excessive. However, they said that real money positioning is still likely underweight, given budget uncertainty.

"Although the market is once again being driven by the short end, three-year yields are still 20 basis points above the July average," the bank said, adding that it sees tactical value in three-year Italian bonds.

Three-year bond yields in Italy were trading at around 1.30 percent on Friday.

But HSBC added that any BTP trade should come with a health warning.

"The market remains volatile, and very sensitive to any headlines bearing on the budget, particularly if they question the position of Finance Minister Tria," the bank said.

(Reporting by Dhara Ranasinghe; Editing by Virginia Furness)