* 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 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.
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)