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Irish yields fall after Moody's removes junk rating
January 20, 2014 / 9:00 AM / 4 years ago

Irish yields fall after Moody's removes junk rating

* Irish yields grind towards multi-year lows

* Moody’s upgrades Irish ratings, outlook

* Moody’s to release review of France on Friday

By Emelia Sithole-Matarise

LONDON, Jan 20 (Reuters) - Irish yields headed back towards eight-year lows on Monday after Moody’s upgraded the country to investment grade with a positive outlook, luring back investors prohibited from buying junk-rated bonds.

Moody‘s, which was the only rating agency to class Irish government debt as “junk”, raised it to Baa3 from Ba1 with a positive outlook, citing the economy’s growth potential and restored market access as the main drivers.

This brings Dublin, which exited an international bailout programme in December, back into the widely-tracked JPMorgan’s EMU Government Bond Investment Grade Index and encourages investors tracking the index to buy its bonds.

Irish 10-year bond yields fell 14 basis points to 3.30 percent, within a whisker of eight-year lows plumbed on Jan. 8 and bringing them further below Italian and Spanish equivalents.

Ireland’s debt yield premium over German benchmarks shrank to 155 bps, near to its narrowest level since early 2010 before Dublin was sucked into the euro zone debt crisis and forced to follow Greece into seeking an international bailout.

“The surprise was the positive outlook from Moody‘s, which means the market will start positioning for higher ratings for Ireland to above triple-B, and that’s what is driving the fall in spreads,” said ING strategist Alessandro Giansanti.

Standards and Poor’s and Fitch rate Irish debt three notches above junk status at BBB+. S&P lifted its outlook to positive last year while Fitch, which is next in line to give an update in a month’s time, has a stable outlook.

Many in the market see Irish yields closing in on those of higher-rated French and Belgian debt as its economy picks up. Giansanti predicted another 20 bps tightening in Irish 10-year yield spreads over Bunds in coming months.

“The secondary market is not so liquid in Ireland to attract huge sizes (of buying) but demand will stay there. Based on fundamentals and expectations of GDP growth, Ireland is one of the most attractive countries in the periphery, even if now it’s not at cheap levels in spread terms.”

FOCUS TURNS TO FRANCE

Yields on Portuguese 10-year bonds - for which Moody’s maintained its “junk” rating with a stable outlook and which S&P removed from credit watch last week - edged 2.5 bps lower to 5.07 percent.

They fell back towards 3-1/2-lows on Friday, even though S&P kept a negative outlook on its sub-investment grade rating, suggesting investors were more optimistic than the rating agency that Lisbon can successfully complete its bailout programme later this year.

Focus this week remains on Moody‘s, which is due to release its review of France and Slovenia on Friday. Moody’s has had a negative outlook on France since February 2012 and this could see it make a move this week, analysts said.

“Moody’s rating is better than S&P‘s. And with France struggling on the structural reforms and budget deficit reduction fronts, our base case is for a one-notch downgrade with stable outlook. Such a move fits into our key rating view of further ‘fracturing of core’ bonds,” Commerzbank strategists said in a note.

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