August 18, 2014 / 4:20 PM / in 3 years

Fitch rating upgrade pushes Irish yields below 2 percent

* Fitch upgrades Ireland to A-minus, outlook stable
    * Irish yields touch record low of 1.96 pct
    * Bunds yields rise as Ukraine escalation fears wane
    * QE expectations rising, poll shows

 (Adds fresh comment, updates prices)
    By Marius Zaharia and John Geddie
    LONDON, Aug 18 (Reuters) - Irish 10-year bond yields fell
below 2 percent for the first time on Monday after Fitch became
the second of the three main credit rating agencies to upgrade
the bailed-out country back into the 'A' category. 
    Elsewhere, yields on top-rated German Bunds edged up after
investor fears of a major escalation in the Ukraine conflict
abated, but still remain anchored near record lows of 1 percent.
    The Fitch upgrade took Ireland's ratings to A-minus from
triple-B-plus. The agency cited 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 hit a record low of 1.96
percent early in the day before climbing back to 2.02 percent.
Traders cited profit-taking by hedge funds in low volumes.
Yields on equivalent Spanish and Italian bonds rose by 6 and 5
basis points, respectively, to 2.36 and 2.65 percent.   
    The spread between Irish yields and euro zone benchmark
German Bunds was the lowest since 2008 at 95 bps, having peaked
at about 1,240 bps in 2011 when Ireland was frozen out of bond
markets 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 double-A would prompt some buying from
low-risk institutional investors.
    The Financial Times reported on Sunday that 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.
    For the broader euro zone market, the conflict in Ukraine
remained a major driver.
    Bunds yields rose 4 bps to 1.015 percent
having hit a record low of 0.952 percent on Friday after reports
Ukrainian forces destroyed part of an armed Russian convoy.
Russia said no such force had crossed the border.
    On Monday, Ukraine and pro-Russian rebels accused each other
of hitting a refugee convoy of buses with rocket fire near the
eastern city of Luhansk.
    "It is still a problematic situation, but not an escalation
of the military conflict that we were seeing on Friday," said
Daniel Lenz, fixed income strategist at DZ Bank. 
    Meanwhile, Russian Foreign Minister Sergei Lavrov said no
progress had been made in his talks in Berlin on Sunday with the
Ukrainian, German and French foreign ministers on a ceasefire or
a political solution. 
    Russia and the West have imposed tit-for-tat economic
sanctions that have tarnished the outlook for the euro zone,
whose economy stagnated in the second quarter. 
    Germany's central bank said on Monday the euro zone is
expected to grow more slowly during the rest of the year than
initially thought. 
    The poor data and weaker prospects for a speedy recovery
have raised expectations the European Central Bank may
eventually print money by buying government bonds.
    Money market traders see an even 50 percent chance of an
asset purchase programme, known as quantitative easing, in the
coming year, a Reuters poll found on Monday. 
    That is higher than the one-in-three chance given by
economists in a Reuters poll last week. 

 (Editing by Nigel Stephenson)
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