* Some banks predict two notch upgrade from Moody's
* Investors say bond issue will be watershed moment
* Italian yields hit record low after QE talk
* Rest of periphery rallies
(Updates with Italian yields at record low, adds fresh
By John Geddie and Emelia Sithole-Matarise
LONDON, April 4 The rally in Greek bonds could
get another boost if Moody's upgrades Greece's credit rating,
helping smooth the country's planned return to market just two
years after it defaulted.
Moody's is scheduled to release its review of Greece's
rating after the market close on Friday, with banks such as RBS
predicting as much as a two notch upgrade.
Though still deep in junk territory and below the ratings of
the other two main credit agencies, an upgrade by Moody's would
aid Athens' plans to issue a bond that investors believe will be
a definitive step in the country's turnaround.
Greece's imminent return to markets also comes as the
European Central Bank hinted on Thursday that it could make
asset purchases to fend off potential deflation, stoking
investor appetite for euro zone bonds.
"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 slightly lower on the
day at 6.15 percent.
EYEING ECB QE
Other peripheral euro zone countries are also seeing
tumbling borrowing costs, with markets heartened by Thursday's
comments from the ECB that its policymakers are now unanimously
agreed that outright money-printing - or quantitative easing -
is an option.
A German newspaper report on Friday saying the central bank
has modelled the economic effects of buying 1 trillion euros
($1.37 trillion) of securities as part of a QE programme gave
such a scenario further impetus.
Italian 10-year yields hit a record low of 3.186
percent while Spanish equivalents fell 7 bps on
the day to a new 8-1/2-year low of 3.19 percent.
"The market is probably running ahead of any announcement.
The more there's spread compression the more there will be some
consolidation and correction near term because the move is quite
massive and we don't expect the ECB to announce something before
a couple of months," said BNP Paribas strategist Patrick Jacq.
"But clearly the market is positioning for such a decision."
Yields on junk-rated Portuguese bonds dropped 11 bps to 3.87
percent, the lowest since December 2009. Portugal is
set to resume bond auctions this quarter after suspending them
after its bailout in 2011, and 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.
Irish equivalents were 5 bps lower at 2.97
At the other end of the credit spectrum, German 10-year
yields, the benchmark for euro zone borrowing costs,
fell 5 bps to 1.56 percent after a slightly below-forecast U.S.
jobs report and as investors mulled hints about possible ECB QE.
(Editing by Susan Fenton)