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Grand! Irish bond markets cheer rating upgrade

Monday, 20 Jan 2014 | 6:24 AM ET

Irish government bond yields slid close to eight-year lows on Monday, as investors cheered the country's upgrade from junk by Moody's rating agency late Friday.

The yield on Ireland's benchmark 10-year bonds – a measure of the cost to the country of repaying its debt and a key indicator of perceived risk in a country – tightened to 3.271 percent on Monday. This is close to lows not seen since 2006, and remains comfortably below that of its peripheral neighbors Spain (where 10-year notes yield 3.659 percent) and Italy (where yields are at 3.789 percent).

Meanwhile, Irish five-year government bond yields fell to 1.628 percent – lower even than Sweden's, which were at 1.672 percent.

(Read more: Ireland getsboost as Moody's removes junk rating)

David Roger | Getty Images

This compares to the height of the sovereign debt crisis in 2010, when Ireland's 10-year yield was close to 15 percent, a factor that pushed it to ask for an 85 billion euro ($115.2 billion) bailout from the International Monetary Fund and the country's fellow euro zone members to help it pay down its debt.

Monday's moves lower come after Moody's Investors Service on Friday upgraded the country's sovereign credit rating to Baa3 (investment grade) from Ba1 (junk), and put Ireland on a positive outlook.

"In all, this is a positive result, albeit one that was very much overdue (given that Irish bond yields have not been consistent with a sub-investment grade rating for quite some time)," Philip O'Sullivan, chief economist at Investec in Dublin, said in a note on Monday.

The rating agency said the two main drivers for the upgrade were the growth potential of the Irish economy, and its government's exit from its bailout program on schedule.

In December, Ireland became the first of the euro zone's financial crisis casualties to leave its aid program, and the country's first bond auction since the exit was met with strong demand in January. To qualify for the loan, Ireland had to agree to impose a harsh program of austerity measures and reforms which had a damping effect on the country's economy.

(Read more: Why foreign investors are buying in to Ireland)

Following January's successful bond auction and the recent upgrade, the head of Ireland debt agency (the National Treasury Management Agency, or NTMA) John Corrigan told state broadcaster RTE on Monday that he would announce the first of a series of bond auctions "in the next week or two."

Until Friday, Moody's was the only rating agency to class Ireland's debt as junk, which O'Sullivan said had been a barrier to some investors.

"A lot of investors had disregarded Moody's stance, but there were some who wanted to invest in Ireland, but were unable to for technical reasons because of that rating," he told CNBC.

"The move by Moody's thereby increases the market for Ireland government bonds, and on the back of that it's no surprise they've tightened again this morning."

Will Irish debt demand hold up throughout 2014?
Ireland drew strong demand for its first post-bailout debt sale on Tuesday but can that momentum last? CNBC's Catherine Boyle reports.

Danske Bank analysts Anders Møller Lumholtz and Owen Callan agreed, stating that although rating moves often have limited market impact, they did expect Irish bonds to get some tailwind following the upgrade.

They added: "Going forward, we in particular expect increased interest from official money resulting in a broader investor base."

The rating upgrade comes against a background of improving economic indicators for Ireland. Third-quarter gross domestic product (GDP) beat expectations and expanded by 1.5 percent on the quarter, while growth for the second quarter was revised up from 0.4 percent to 1 percent.

"Despite Moody's hesitation, the Irish recovery has been well-accepted and understood in the market, which currently is pricing Irish sovereign bonds as BBBplus (or better)," Lumholtz and Callan added.

(Read more: Ireland's bailout exit feted by bond markets)

Rating agencies S&P and Fitch both have Ireland at BBB-plus – two notches higher than Moody's.

Another upgrade likely?

Investec's O'Sullivan said he was "optimistic, but not complacent," about Ireland outlook.

"It is continuing to punch above its weight in terms of attracting foreign investment and jobs, positioning it quite well to move ahead from here," he told CNBC.

"This will help cushion it from weakness elsewhere -- but Ireland is not immune to everything. It is a very small country, after all."

Despite this caution, however, Lumholtz and Callan said Moody's rating upgrade set the scene for more upgrades over the coming year.

"Growth has accelerated, Ireland is set to achieve a primary surplus in 2014, government debt has peaked and the large cash buffer at the NTMA (National Treasury Management Agency) implies that Ireland is prefunded to 2015," they said.

"The Irish government has so far delivered all the fiscal belt-tightening required by the (bailout) program. In short, another upgrade this year seems likely."

Moody's next credit rating review for Ireland is due on May, 16.

By CNBC's Katrina Bishop. Follow her on Twitter @KatrinaBishop and Google

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