Ratings upgrade subdues Greek yields, Irish supply eyed

Mon Sep 15, 2014 11:56am EDT

Reuters

* Investors buoyed by S&P ratings lift

* PM Samaras says Greece will not need third bailout

* Fed meeting, Scotland vote pose volatility risks

* Spain's bonds claws back ground after torrid week (Updates prices, adds analyst comment)

By John Geddie

LONDON, Sept 15 (Reuters) - Greek bond yields edged lower on Monday after Standard & Poor's upgraded the country's credit rating, saying the economy remained on track to emerge from a six-year recession.

The upgrade to B from B- late on Friday is a boost for Greece's fragile coalition government, which is hoping to escape the constraints of its EU/IMF bailout programme.

Greece is expected to hold negotiations with its lenders on further debt relief later this year, and Prime Minister Antonis Samaras told a weekend newspaper he is confident the country will not need a third bailout.

Greek 10-year bond yields dipped 3 basis points to 5.70 percent at Monday's open, before paring some of these gains in afternoon trade.

"The upgrade was by-and-large expected, but it explains the slight outperformance this morning," said Rainer Guntermann, a rates strategist at Commerzbank.

Fitch raised Greece's rating to B in March and Moody's upgraded it to Caa1 in August. In keeping with the broad trend of ratings upgrades for peripheral Europe, analysts are now predicting Moody's will pull Slovenia up to investment grade in a review due on Friday.

Before then, markets are looking to the U.S. Federal Reserve's meeting on Wednesday for hints of when it might raise interest rates for the first time in more than eight years.

Any U.S. hike could drive up borrowing costs for euro zone countries despite the European Central Bank's ultra-loose monetary policy.

More immediate market volatility in the euro zone could stem from a closely-fought referendum on Scottish independence from the United Kingdom being held on Thursday.

Analysts say a 'Yes' vote to break away could hurt bond markets in countries like Spain and Belgium which also have separatist movements, driving investors towards traditional safe haven assets such as German Bunds.

One weekend poll showed the No vote 8 points in front, while another showed the same lead for the Yes camp and two others a 51-49 percent and 53-47 percent split respectively in favour of sticking with the union.

Spanish bonds clawed back some ground on Monday, after suffering their weakest spell in more than a year last week. Spanish 10-year yields were 1 bps lower at 2.35 percent. Some market participants remained wary ahead of the Scottish vote, preferring Italian bonds to Spanish ones.

"Catalonia headline risk means we take profits on our long Italy versus Spain in 5-year bonds and move it to 10-year (paper)," RBS strategists said in a note.

IRISH SUPPLY

Elsewhere, Ireland's bond yields saw some early weakness as analysts predicted the government would have to borrow more from markets in the coming year to replace bailout loans it plans to pay back to the International Monetary Fund ahead of schedule.

Euro zone finance ministers on Friday backed Ireland's plan to start paying back some 18 billion euros ($23 billion) of loans by the end of the year.

While the country's healthy cash balance will cushion some of this early repayment, some analysts predict bond issuance to increase by four to five billion euros in both 2014 and 2015.

Any supply increase is likely to be negative for secondary market prices as countries tend to pay a premium to sell new debt. In Ireland's case, some say demand may also be limited.

"There is potentially less capacity for the absorption of this paper than there was before the crisis," said Gianluca Ziglio, executive director of fixed income research at Sunrise Brokers, citing the erosion in Ireland's credit rating while debt levels remain among the highest in the bloc.

Ireland has issued 7 billion of a targeted 8 billion euros under this year's funding programme, and aims to raise 8-10 billion euros in 2015.

Irish 10-year yields hit a high of 1.90 percent in early trading, some 3 bps higher on the day, before reversing losses. (1 US dollar = 0.7724 euro) (Editing by Catherine Evans/Ruth Pitchford)