Fitch rating upgrade pushes Irish yields below 2 percent

Mon Aug 18, 2014 6:56am EDT

* Fitch upgrades Ireland to A-, outlook stable
    * Irish yields fall to record low of 1.96 pct
    * Russia says some progress in talks with EU powers

    By Marius Zaharia
    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 held close to their record lows below 1
percent as uncertainty over developments in the region remained
high, maintaining investor interest in safe-haven assets.
    The Fitch upgrade took Ireland's ratings to A minus from BBB
plus, with the agency citing a continued improvement in the
country's finances over the last year. Standard & Poor's took a
similar step 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
exited its three-year EU/IMF bailout programme last year.
    Ten-year Irish yields fell to a record low of
1.96 percent early in the day before climbing back up to 2.01
percent with traders citing profit-taking by hedge funds in low
volumes. At the end of last year, analysts polled by Reuters
predicted even Bund yields would trade above 2 percent in 2014,
but weak data and political risks have prevented that.
    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.
    The Financial Times reported on Sunday some Wall Street
banks were drawing up preliminary plans that include moving some
of their London-based operations to Ireland to deal with the
possible scenario of Britain leaving the European Union.
    
    '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. 
    "We saw some diplomatic efforts over the weekend and there
has been no major escalation in the conflict but it is much too
early to extrapolate this for the rest of the week," said
Norbert Wuthe, rate strategist at Bayerische Landesbank.
    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. 
    "Continued weak data will increase pressure on the central
bank to introduce a programme of bond buying," said Alan
Higgins, chief investment officer for UK at Coutts. 

 (Reporting by Marius Zaharia, editing by John Stonestreet)
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