* Ireland outperforms peripheral peers ahead of ratings news
* Irish 10-years close on U.S. Treasuries after Gilt
* Spain launches inaugural linker in subdued market
(Updates with Spanish launch of debut linker, adds fresh
By John Geddie and Emelia Sithole-Matarise
LONDON, May 12 Irish bond yields held near
record lows on Monday, a whisker above equivalent U.S. borrowing
costs, and were poised for further impetus from an expected
ratings upgrade from Moody's this week.
Having dropped below UK Gilt yields on Friday for the first
time in six years, the country's 10-year bonds could shortly set
another milestone and slip below global benchmark U.S. yields,
supported by Ireland's economic recovery coupled with
accommodative central bank policy.
The divergence in policies, whereby the European Central
Bank has raised the prospect of asset purchases if inflation
remains ultra-low, while the U.S. Federal Reserve is scaling
back its own programme, is spurring investor appetite for
peripheral euro zone bonds.
"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.
The bank is predicting a one-notch upgrade for Ireland when
Moody's releases its latest credit review of the country on
Irish 10-year yields outperformed other
peripheral bonds on Monday, dipping 2 basis points in early
trade to hit 2.66 percent before retracing to last trade at 2.67
percent. UK and U.S. yields were quoted
at 2.73 percent and 2.65 percent, respectively.
Ratings upgrades in the periphery continued on Friday, when
Standard & Poor's lifted Portugal's credit outlook to stable
from negative, and 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 a major reversal of these gains with the ECB ready to
deliver fresh monetary stimulus next month.
"Obviously the whole story driving the market is the very
large expectation that the ECB will deliver. There's a risk they
may not deliver in June," said Gianluca Ziglio, executive
director of fixed income research at Sunrise Brokers.
Others expect yields to fall even further, especially for
Portugal which still offers relatively higher yields and as some
in the market expect the country to regain investment grade
credit status in coming months.
"We are long Portugal and have been for some time even though
it is sub-investment grade because in this policy mix we are
likely to see upgrades take Portugal back to investment grade,"
said Jack Kelly, investment director for fixed income at
Traders said an escalation in unrest in Ukraine, after
anti-Kiev rebels declared victory in a referendum on self-rule,
was taking the gloss off last week's rally, leading to some
minor profit-taking elsewhere in the periphery.
Spanish and Italian yields rose 4
bps and 2 bps respectively, to hit 2.94 percent and 2.97
percent. Greek and Portuguese
equivalents rose 10 bps and 5 bps to 6.21 percent and 3.59
It was an unremarkable backdrop for Spain to begin marketing
its first ever bond linked to euro zone inflation.
Pension and insurance companies that need to hedge their
liabilities against inflation have proved resilient buyers of
linkers in recent years despite muted prospects for consumer
price growth. However, with euro zone inflation now running at
just 0.7 percent, well below the ECB's target of just under 2
percent, extra demand for Spain's inaugural issue is likely to
(Editing by Susan Fenton)