LONDON: Ireland's 10-year government bond yield fell to a one-month low on Friday, outperforming euro zone peers ahead of a Moody's ratings review that may result in an upgrade for Europe's fastest growing economy.
Most euro zone bond yields were flat to a touch lower, with benchmark German Bund yields close to Thursday's one-month low as data showed stronger-than-expected German economic growth in the first quarter.
But Irish yields fell 4 basis points with analysts at Commerzbank and Rabobank saying there was a likelihood that Moody's could upgrade Ireland's Baa1 rating, for which it currently has a positive outlook.
A fall in Ireland's debt-to-GDP ratio below 100 percent, a commitment to improving the fiscal position and progress in strengthening the banking sector all bode well for a ratings upgrade, analysts said.
Ireland has rebounded quickly from a 2010 international bailout and its economy benefited in 2015 from further falls in unemployment, a bumper year for retail sales and a weak euro that boosted its large export sector.
The Irish economy grew by 7.8 percent in 2015, making it the fastest growing economy in the European Union for a second straight year.
Political uncertainty has also eased a little after Enda Kenny was re-elected Ireland's prime minister a week ago, ending 10 weeks of political deadlock that followed an inconclusive national election.
"A stronger economy is helping bring down Ireland's debt-to-GDP ratio at a fast pace and the new government, while in a minority, remains committed to fiscal consolidation," said Lyn Graham-Taylor, a fixed income strategist at Rabobank.
"We're confident about a one-notch upgrade." Ireland's 10-year bond yield fell to 0.82 percent , the lowest level in just over a month, outperforming German and French yields which were steady at 0.15 percent and 0.50 percent, respectively .
The outperformance helped to narrow the yield gap between Irish and German bonds to about 69 bps - down from 79 bps a week ago when the spread was at its widest since late February.
The Irish/French 10-year yield spread has narrowed about 7 bps over the past week.
Commerzbank analysts said a ratings upgrade together with the completion of Irish bond issuance for the second quarter should allow Irish bonds to keep a bullish momentum against French peers even with Britain's referendum on EU membership looming in June.
Britain is one of Ireland's biggest trading partners and a vote to leave the European Union - or Brexit - is a risk for the Irish economy.
Cantor Fitzgerald analysts estimate that the average daily volume in Irish government bonds has fallen 40 percent since 2016 began as investors withdraw ahead of the British vote.
For some analysts, the U.K. referendum was a reason to remain cautious towards Irish bonds.
"Moody's rating on Ireland has lagged Fitch and S&P, so Irish bond prices are appreciating on the back of expectations for an upgrade today," said Natixis fixed income Cyril Regnat.
"But I would be a bit more cautious because if we get a Brexit, then Ireland would be one of the biggest casualties in the euro zone," said Natixis strategist Cyril Regnat.
Research by Davy Stockbrokers shows that a one percent decrease in U.K.
economic output has led in the past to a 0.3 percent drop in Ireland.
Standard & Poor's is scheduled to give an update on Italy later in the day. Commerzbank expressed some caution over Italian bonds ahead of an S&P ratings review but expected the agency to affirm Italy's rating at BBB- with a stable outlook.
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