LONDON, Oct 22 (Reuters) - Italian government bond yields dropped across the curve in early trade on Monday after ratings agency Moody's kept the country's sovereign ratings outlook stable while delivering an expected downgrade on Friday.
Investors were worried that the agency would not only downgrade Italy's sovereign rating to Baa3 - the lowest investment grade rating - but also set the outlook to 'negative', increasing the risk of a junk rating for the euro zone's third largest country.
Italy's five-year government bond yield dropped 26 basis points to a two-week low of 2.76 pct, while the benchmark 10-year yield was 19 bps lower at 3.39 percent.
The Italy/Germany 10-year govt bond yield spread tightened to 289 bps. (Reporting by Abhinav Ramnarayan, editing by Karin Strohecker)