Rating upgrade pushes Irish yields below 2 percent

LONDON Mon Aug 18, 2014 3:47am EDT

LONDON Aug 18 (Reuters) - Irish 10-year bond yields fell to a record low below 2 percent on Monday after Fitch became the second of the three main credit agencies to give the country an A rating for the first time since before its international bailout.

Yields on top-rated German Bunds inched higher after Russia said some progress has been achieved during talks with European powers on Sunday on ways to end the military conflict in Ukraine. But they remained close to their record lows below 1 percent as uncertainty in the region remained high.

Ireland's upgrade took its ratings to A minus from BBB plus, with the agency citing a continued improvement in the country's finances over the last year. The move follows a similar rating action by Standard & Poor's in June.

The move does not trigger forced buying from investors tracking ratings-based bond indices. But it reinforces the improved sentiment towards the country since it successfully ended its three-year EU/IMF bailout programme last year.

Ten-year Irish yields fell 4 basis points to 1.96 percent. At the end of last year, analysts polled by Reuters predicted even Bund yields would trade above 2 percent in 2014.

The spread between Irish yields and the European benchmark was the lowest since 2008 at 95 basis points, having peaked at about 1,240 bps in 2011 when Ireland had no market access and some investors worried it might default.

"The sentiment on Ireland has improved so much," said Alessandro Giansanti, senior rate strategist at ING.

"If you look at some A minus corporates, they trade some 80 basis points above Bunds so there is some room for further appreciation."

He said upgrades to AA would prompt some buying from low-risk institutional investors.

'A CERTAIN PROGRESS'

For the broader euro zone market, the conflict in Ukraine remained a major driver.

Bund yields rose 2 basis points to 0.995 percent, having hit a record low of 0.952 percent on Friday.

Russia's comments that "a certain progress" has been achieved during talks at the weekend paused the flows into assets perceived as safe havens, although investors remained wary.

Ukrainian forces have raised their national flag over a police station in Luhansk that was for months under the control of pro-Moscow separatists. But officials said the rebels were fighting a rearguard action.

"There are some hopes that they might be able to make some diplomatic progress," said Nick Stamenkovic, a bond strategist at RIA Capital Markets.

"But the two sides are still far off a diplomatic solution and it shouldn't be a trigger for a Bund sell-off."

Russia and the West have imposed tit-for-tat economic sanctions which have tarnished the outlook for the euro zone, whose economy stagnated in the second quarter.

The poor economic data and the weaker prospects for a speedy recovery have increased expectations that the European Central Bank may eventually start printing money by buying government bonds. (Reporting by Marius Zaharia, editing by John Stonestreet)

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