LONDON, April 4 (Reuters) - The relentless rally in Greek bonds seen over the past two years could be given a further leg up on Friday, with ratings agency Moody's widely expected to lift at least the rating outlook of the euro zone's weakest link.
Some market participants expect as much as a two notch upgrade from Moody's, which would take its rating back to parity with the other main agencies and accelerate its planned return to debt markets.
"There is talk among investors that the country could return to market as early as next week if Moody's do upgrade it," said a trader at a market maker in Greek government bonds.
Greece hired a group of banks to manage the sale of a 2 billion euro five-year bond on Thursday, Thomson Reuters market service IFR reported, with sources suggesting the bonds will be issued sometime in April.
The country, which has been locked out of capital markets since it accepted a bailout in 2010, is rated Caa3 by Moody's, nine notches below investment grade. Standard and Poor's and Fitch rank Greece six notches below investment grade at B+.
"The expected rating upgrade, and the subsequent return of Greece, will give Greek yields another boost," said Christian Lenk, fixed income strategist at DZ Bank.
Greek 10-year yields were unchanged on the day at 6.13 percent.
DZ's Lenk said Greek yields could push through 6 percent, returning to levels not seen since January 2010. Two bailout packages worth 240 billion euros have been agreed since.
Other peripheral euro zone countries are also revelling in borrowing costs that have reached multi-year lows, with markets heartened by Thursday's promise from the European Central Bank that it now unanimously agreed that outright money-printing - or quantitative easing - was an option.
Spanish and Italian 10-year yields were 4 basis points lower on the day at 3.19 percent and 3.22 percent, respectively, while Irish and Portuguese equivalents were 5 bps lower at 2.97 percent and 3.93 percent.
In further evidence of the divergent inflation prospects and central bank policy between the U.S. and Europe, Spanish five-year yields dropped below U.S. Treasuries for the first time since 2007 on Thursday.
Spanish five-year yields were at 1.78 percent, 2 bps below the U.S. equivalent at 1.80 percent.
That gap could widen further if the United States posts strong employment growth via its non-farm payrolls data on Friday.
"We could see a minor rate rise is Europe (after the jobs data) but there will be further widening of the transatlantic spread because both markets and economies are in very different states," said Lenk at DZ Bank.
(Editing by Toby Chopra)