EURO GOVT-Irish debt steady before key stress tests

* Ireland in focus ahead of key stress tests

* Portugal, Greece pressured after S&P downgrade

* Italian tender shows decoupling from weaker periphery mkts

By Marius Zaharia

LONDON, March 30 (Reuters) – Irish government bonds were
steady on Wednesday, but investors had a selling bias before
Thursday’s bank stress tests, which are expected to be followed
by credit ratings downgrades and a rise in yields.

The Irish government has set aside about 35 billion euros
for its debt-ridden banks and the tests are expected to show
banks needed less than that, but even a surprisingly positive
result may be powerless to reverse a rising trend in yields.

Most analysts expect any potentially good news to be
countered by a ratings downgrade. Standard & Poor’s downgraded
Greece and Portugal on Tuesday, citing risks the countries’
debts to a new European bailout fund would be repaid before bond
investors. [ID:nLDE72S1LY]

Ireland, a receiver of financial aid, faced the same risks
mentioned by S&P, but its rating was still three notches higher
than Portugal’s. S&P said it was “focussed” on the results of
the tests and they would have an effect on its next move.

“I think the market is positioned for less (capital than the
government has set aside), but it is a pretty enormous figure no
matter what,” one trader said.

“It is an illiquid market, but the better bias is to sell as
Ireland may be downgraded after the stress tests.”

Irish/German 10-year debt yield spreads (IE10YT=TWEB: Quote, Profile, Research)
(DE10YT=TWEB: Quote, Profile, Research) were last 3 basis points tighter on the day at 680
bps. Equivalent Greek/German spreads were slightly wider, while
Portuguese markets were steady.

The credibility of the stress tests was also questioned by
some in the market, pointing to results of similar exercises in
the past which prefaced still-deepening banking problems in
Ireland and Spain.

“Governments and officials can do a lot of tests, but the
question is whether the market is going to believe them,” said
Michael Leister, strategist at WestLB.

ING strategist Alessandro Giansanti said a steady trend of
rising yields in Ireland, supported by expectations it will
eventually have to restructure its debt, can only be reversed if
the country posted “very good” economic growth data.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Euro vs. peripheral bond spreads http://r.reuters.com/neq78r Euro zone credit ratings http://r.reuters.com/pyh48r Euro zone debt struggles http://r.reuters.com/hyb65p Greek, Irish, Portuguese yld curves: http://link.reuters.com/bec78r ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

DECOUPLING

Italy saw healthy demand at an auction of 9.17 billion euros
worth of bonds earlier in the day and the sale signalled further
decoupling from troubled markets in Athens, Lisbon and Dublin.
[ID:nLDE68C0H1]

Italian and Spanish spreads over German Bunds held their own
over the past weeks, despite renewed pressure in the euro zone’s
highly-indebted “periphery” caused by a raft of ratings
downgrades and a government collapse in Portugal.

“We stick to our tactical spread tightening recommendation
in (Italian) and Spanish government bonds versus Bunds as long
as the decoupling story of those bonds … continues to run its
course,” said David Schnautz, rate strategist at Commerzbank.

Investors remained eagle-eyed for any fiscal slippage or
disappointing economic growth data in Spain, analysts said.

Bund futures (FGBLc1: Quote, Profile, Research) were last 17 ticks down on the day at
121.33, tracking losses in U.S. Treasuries triggered by a
Federal Reserve official saying it should trim its bond-buying
campaign. [US/]

“The Fed was hawkish and that is weighing on Bunds as well,
it’s reminding people the ECB (European Central Bank) is going
to hike next week,” another trader said.
(Editing by Patrick Graham)

EURO GOVT-Irish debt steady before key stress tests