LONDON: Irish bond yields dipped on Monday after Moody's lifted the country's rating by two notches, citing strong growth dynamics which are expected to speed up fiscal consolidation and cut the country's debt.
At around 120 percent of GDP, Ireland still has one of the most bloated government debt burdens in the euro zone.
But with the economy set to grow at 2 percent this year, and further rating upgrades expected, Irish bonds should continue to outperform other indebted states from the bloc's periphery.
"Ireland has come from being one of the weakest countries in the euro zone but now in an upwards rating cycle, Ireland should do better than its current peers," said Peter Schaffrik, head of European rates strategy at RBC.
Moody's upgraded Ireland's credit rating from Baa3 to Baa1 after European markets closed on Friday, bringing its view into line with the other two main ratings agencies.
Standard and Poor's is due to review Ireland's rating on June 6, with many hoping its current positive outlook means another upgrade is on the cards.
Fitch may then follow suit in mid-August.
Ireland's 10-year yields dipped 4 basis points on Monday to hit 2.65 percent, just above last week's record lows.
Its bonds outperformed peers in Spain, Italy and Portugal, whose yields dropped 1 bps to 2.96, 3.06 and 3.77 percent respectively.
TAKING THE REINS
In another boost for the periphery, Portugal exited its 78 billion euro bailout, taking back control of its public finances from the European Commission, European Central Bank and International Monetary Fund.
The rescue programme assembled in 2011 for the nearly bankrupt country concluded with Portugal's budget in much better shape and borrowing costs at eight-year lows.
The country has chosen not to apply for a precautionary credit line, a move that will focus investor attention on a mixed economic outlook where unemployment stands at 15 percent and GDP dropped 0.7 percent in the first quarter of 2014.
Some market participants are worried that the government's plans to partly reverse salary cuts in the public sector and possibly cut taxes next year could undermine efforts so far.
"The fact they don't have Troika lenders closely telling them what to do does not mean that they should delay the reform efforts achieved so far or move in a different direction," said Alessandro Giansanti, senior rates strategist at ING.
CLOSELY WATCHED
The brutal sell-off in Greek bonds at the end of last week appeared to have been arrested on Monday although government instability was still playing on investors' nerves.
Greek 10-year yields dropped 10 bps to 6.79 percent, pulling back from two-month highs hit last week after the government appeared to backtrack on a controversial legacy capital gains tax on foreign bondholders.
European elections this week are being closely watched as a gauge of sentiment towards the coalition of Prime Minister Antonis Samaras, which came to power two years ago and holds just a two-seat majority in parliament.
In an ominous sign for markets, Greece's anti-bailout Syriza party performed strongly in the first round of local elections on Sunday.
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