Moody's outlook change sends Irish debt premium to 3-1/2 year lows
LONDON, Sept 23 (Reuters) - Ireland's debt premium fell to its lowest in almost 3-1/2 years on Monday after Moody's moved a step closer to restoring the country's investment grade ratings months before its exit from a bailout programme.
Moody's remains the only one of the three big agencies to class Ireland as "junk", but its move to lift the rating outlook to stable from negative is against a trend of mostly negative rating actions against euro zone sovereigns in recent years.
The outlook change came just days after Portugal, another country nearing the end of its bailout, was placed on credit watch negative by Standard & Poor's.
While investors already regard Ireland as investment grade, its credit rating trend reinforces its ongoing separation from the rest of the periphery, analysts said.
"The decoupling is already taking place," UniCredit rate strategist Luca Cazzulani said.
Ten-year Irish bond yields were last down 3.3 basis points to 3.858 percent, narrowing the gap with the benchmark German Bund yields to 196 basis points, the lowest since May 2010 and down from euro-era highs of over 1,200 bps.
Ireland plans to get a precautionary credit line from the euro zone's bailout fund to smooth its return to the market once its current 85 billion euro programme ends later this year.
Regular debt sales and the commitment to stick to the reforms attached to an aid programme would make Ireland the first euro zone country eligible for the European Central Bank's so far untested bond-buying programme, giving it faster access to the bloc's most powerful anti-crisis tool if needed.
Irish yields have traded below those of Italy and Spain for most of this year, despite the fact that the two biggest peripheral countries never lost market access during the crisis.
In contrast, Portuguese 10-year yields were above 7 percent, levels which analysts say are unaffordable and block the country's access to markets.
"We've got more capacity to grow in the future than the rest of the peripheral countries," said Alan McQuaid, chief economist at Merrion Stockbrokers in Dublin. "What's more significant is that Portugal's problems don't seem to be affecting us whatsoever."
Getting rid of the junk status may further improve sentiment towards Ireland but the market reaction might be limited as only minor amounts of buying from index-tracking bond funds was expected.
Ireland's rating excludes it from just one major index, JPMorgan's EMU Government Bond Investment Grade Index, which is only tracked by 3-5 billion euros of bond funds. Irish bonds would have only a 1.6 percent weight if they were included.
"The element of surprise is (also) lacking. Ireland is already perceived as the strongest of the peripheral countries so it's understandable the market is not going crazy about (its ratings), DZ Bank rate strategist Christian Lenk said.
Irish bonds outperformed all other euro zone bonds, which traded mostly steady on Monday, little affected by data showing the euro zone business activity grew faster than expected in September.
The reaction to Chancellor Angela Merkel's win of a third term in Sunday's German elections was also limited, with investors keen to see the shape of the new government in the euro zone paymaster before taking a view on how it will affect European policy.