Irish bond rally nears new milestone, rating upgrade eyed

LONDON Mon May 12, 2014 3:49am EDT

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LONDON May 12 (Reuters) - Irish yields dipped back towards record lows on Monday, holding beneath equivalent UK government bonds, and poised for further impetus from an expected ratings upgrade from Moody's this week.

Having dropped beneath UK Gilt yields for the first time in six years last week, Irish yields are now on course to drop below those of U.S. Treasuries.

"At some point, European and U.S. rates will sharply decouple, and we would expect Irish bonds to trade well through U.S. Treasuries," said Marco Brancolini, a rates analyst at RBS, which is predicting a one-notch upgrade for Ireland on Friday.

Irish 10-year yields opened 2 basis points lower at 2.66 percent. Equivalent UK and US bonds were quoted at 2.71 percent and 2.63 percent, respectively.

The trend of ratings upgrades in the periphery was again confirmed on Friday, when first Standard & Poor's lifted Portugal's credit outlook to stable from negative, and then Moody's upgraded it by one notch.

This provided fresh momentum to a peripheral rally that had seen Italian, Spanish and Irish yields hit record lows, and few expect any reversal of these gains with the European Central Bank ready to deliver fresh monetary stimulus next month.

"We could go much further through (current levels) given the right set of circumstances," said Padhraic Garvey, head of investment-grade strategy at ING.

"There is a belief now that the ECB is going to take further measures."

Scheduled releases of euro zone economic output and consumer prices on Thursday will be closely watched to see if they make ECB action more likely, while low levels of liquidity in the euro zone banking sector are also exacerbating money market tensions.

Any escalation in unrest in Ukraine after anti-Kiev rebels declared victory in a referendum on self-rule could also lessen investors' overall risk appetite this week.

However, traders say that Spanish and Italian bonds, once at the centre of fears of euro collapse, are now proving resilient to geopolitical shocks. Both held just above record lows on Monday, as did safe haven German Bunds.

In primary markets, Spain hired a group of banks to manage the sale of its first ever bond linked to euro zone inflation. The deal will be launched in the near future, subject to market conditions. (Editing by Kevin Liffey)

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