Moody's upgrade drives Irish five-year yields to record low

Mon Jan 20, 2014 7:17am EST

Related Topics

* Irish five-year yields dip below U.S. equivalents

* Moody's upgraded Irish ratings, outlook after Friday close

* Irish yields seen closing in on those of France, Belgium

* Moody's to release review of France on Friday

By Emelia Sithole-Matarise

LONDON, Jan 20 (Reuters) - Ireland's five-year borrowing costs fell to their lowest in the 92-year history of the state on Monday as investors snapped up its bonds after Moody's restored the country's credit rating to investment grade.

Yields on five-year Irish bonds fell marginally below equivalent U.S. Treasuries, the global benchmark, with investors anticipating further ratings upgrades in coming months supported by an improving economy.

Moody's, which was the only rating agency to class Irish government debt as "junk", raised it to Baa3 from Ba1 with a positive outlook after the market closed on Friday, citing the economy's growth potential and restored market access as the main drivers.

Ireland exited an 85-billion-euro international bailout programme in December.

The ratings upgrade means investors prohibited from buying junk-rated debt will be able to buy Irish bonds and that the paper may be eligible for a return to the widely-tracked JPMorgan EMU Government Bond Investment Grade Index.

Irish five-year yields dropped 17 basis points a low of 1.625 percent, just below the 1.6254 percent equivalent U.S. yields touched at Friday's close, according to Reuters data. The U.S. market was closed on Monday.

Irish yields topped 18 percent in mid-2011 at the height of the euro zone debt.

Ten-year yields also fell 17 bps on Monday, to 3.275 percent, near eight-year lows plumbed on Jan. 8 and taking them further below Italian and Spanish equivalents.

"The surprise was the positive outlook from Moody's, which means the market will start positioning for higher ratings for Ireland to above triple-B, and that's what is driving the fall in spreads," said ING strategist Alessandro Giansanti.

Ireland's NTMA debt agency head John Corrigan told state broadcaster RTE that he thought Moody's may upgrade again within 12-15 months if Ireland sticks to its fiscal targets.

Standards and Poor's and Fitch rate Irish debt three notches above junk status at BBB+. S&P lifted its outlook to positive last year while Fitch, which is scheduled to give an update in a month's time, has a stable outlook.

CLOSING IN ON FRANCE

The cost of insuring against an Irish default also fell sharply. Five-year credit default swaps broke below 100 bps for the first time since 2008, to 93 bps, according to prices from provider Markit.

Ireland's debt yield premium over German benchmarks shrank to 152 bps, near its narrowest level since early 2010 before Dublin was sucked into the euro zone debt crisis and forced to follow Greece into seeking an international bailout. Traders and analysts expect the spread to tighten further.

"European real money has been quite active this morning on the back of the upgrade. I'd expect a further 20 to 25 basis points tightening in the 10-year (Irish) spread against Bunds over the next two to three months," one trader said.

Many in the market see Irish yields closing in on those of higher-rated French and Belgian debt as its economy picks up.

France is considered vulnerable to a downgrade as Moody's has had a negative outlook on the euro zone's second largest economy since February 2012 and Paris is expected to struggle to keep up with structural reforms. Moody's is scheduled to release its review of France and Slovenia on Friday.

"Moody's rating is better than S&P's. And with France struggling on the structural reforms and budget deficit reduction fronts, our base case is for a one-notch downgrade with stable outlook. Such a move fits into our key rating view of further 'fracturing of core' bonds," Commerzbank strategists said in a note.

Yields on Portuguese 10-year bonds, on which Moody's maintained its "junk" rating with a stable outlook earlier this month, and which S&P removed from credit watch negative on Friday, fell to their lowest since August 2010, around 5.026 percent.

They resumed their fall on Friday even though S&P kept a negative outlook on its sub-investment grade rating, suggesting investors were more optimistic than the agency that Lisbon can successfully complete its bailout programme later this year.

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