Greece ratings move could smooth crucial bond market return

Fri Apr 4, 2014 7:56am EDT

* Some banks predict two notch upgrade from Moody's

* Investors say bond issue will be watershed moment

* Portugal leads periphery rally after QE talk (Recasts, adds fresh quotes)

By John Geddie

LONDON, April 4 (Reuters) - The relentless rally in Greek bonds could be given a further leg up by ratings agency Moody's on Friday, with an expected uplift helping smooth the country's planned return to market just two years after it defaulted.

Banks such as RBS predict as much as a two notch upgrade from Moody's, which would take its rating back to parity with the other main agencies, and aid its plans to issue a bond which investors believe will be a definitive moment in its turnaround.

"This is the beginning of the end of the sovereign debt crisis for Greece," said Jason Manolopoulos, managing partner at Dromeus Capital, an asset manager which holds Greek bonds.

Greece hired a group of banks to manage the sale of a 2 billion euro five-year bond on Thursday, Thomson Reuters market service IFR reported.

The bond is slated to be issued sometime this month, with some market participants expecting it as soon as next week.

The country, which has been locked out of capital markets since it accepted the first tranche of a 240 billion euro bailout in 2010, is rated Caa3 by Moody's, nine notches below investment grade. Standard and Poor's and Fitch rank Greece six notches below investment grade at B+.

"The expected rating upgrade, and the subsequent return of Greece, will give Greek yields another boost," said Christian Lenk, fixed income strategist at DZ Bank, predicting 10-year yields to fall below 6 percent.

Greek 10-year yields were 1 basis point lower on the day at 6.12 percent.

TRANSATLANTIC DIVERGENCE

Other peripheral euro zone countries are also revelling in borrowing costs that have reached multi-year lows, with markets heartened by Thursday's promise from the European Central Bank that it now unanimously agreed that outright money-printing - or quantitative easing - was an option.

Portugal, which is set to resume bond auctions this quarter after suspending them after its bailout in 2011, will benefit in particular from any QE programme, say strategists.

"Because Portugal has a relatively small issuance programme, even if the ECB buys a share of bonds in relation to the index, it will have a disproportionate benefit for the country," said Alessandro Tentori, global head of rates strategy at Citi.

Portugal's 10-year yields were 8 basis points lower on the day a 3.90 percent, a new four year low. Spanish and Italian 10-year yields were 2 bps lower at 3.21 and 3.24 percent, respectively, while Irish equivalents were 5 bps lower at 2.97 percent.

In further evidence of the divergent inflation prospects and central bank policy between the U.S. and Europe, Spanish five-year yields dropped below U.S. Treasuries for the first time since 2007 on Thursday.

Spanish five-year yields were at 1.78 percent, 2 bps below the U.S. equivalent at 1.80 percent.

That gap could widen further if the United States posts strong non-farm payrolls on Friday.

"We could see a minor rate rise is Europe (after the jobs data) but there will be further widening of the transatlantic spread because both markets and economies are in very different states," said Lenk at DZ Bank. (Editing by Toby Chopra)

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