Ireland starts a eurozone bond party The Irish are always good for starting a party. Dublin's return this week to global capital markets for the first time since exiting its bailout programme in December turned up the music across crisis-hit eurozone bond markets. Orders for Ireland's 10-year bonds hit €14bn - almost four times the €3.75bn Dublin eventually raised. Encouraged by Ireland's apparent turn in fortune, yields, which move inversely to prices, fell in Spain, Italy, Portugal and Greece. "Spreads" over yields on ultra-safe German Bunds fell to levels not seen for at least two years. The party is still in full swing. Portugal - which hopes to exit its bailout this year - on Wednesday announced plans to issue five-year debt and could follow that up by launching its own offer of 10-year bonds. Greece, considering a return to raising debt in capital markets, saw yields on its 10-year bonds fall to the lowest level since mid-2010, when the eurozone crisis first erupted. Unclear, however, is how much further "periphery" yields will fall or how great are the risks of the party being brought to a sudden end - perhaps by a re-eruption of the eurozone crisis or the US Federal Reserve's gradual scaling back of its accommodative monetary policy. The argument for the festivities continuing is that Ireland's bond offer highlighted a significant change in investor sentiment. At the height of the eurozone crisis, conservative investors fled the riskiest looking markets - leaving the field to less risk adverse funds. "With such a massive order book, Ireland showed that there is going to be this enormous shift back into periphery bonds by traditional, core European bond investors," says Philip Brown, head of sovereign capital markets at Citigroup. While the Fed's plans to "taper" its asset purchases, or quantitative easing, have pushed up US and UK government bond yields, the dynamics in eurozone peripheral markets are different. Worries about government defaults have fallen sharply since Mario Draghi, European Central Bank president, promised in July 2012 to do "whatever it takes" to preserve the eurozone's integrity - so investors expect less compensation for "credit risks." Spanish 10-year government bond yields have fallen to 3.78 per cent, the lowest since late 2009. Italy's are down to 3.88 per cent. Ireland's are even lower at 3.54 per cent. The effects have broadened: investors have become increasingly willing to lend on an unsecured basis to a range of banks in Spain, Italy, Portugal and Ireland. Overall periphery bank debt issuance rose 19 per cent last year, with almost half in the final four months of the year, according to Dealogic. The monetary policy stance of the ECB, which meets in Frankfurt on Thursday, could push yields lower still. With economic growth weak, unemployment still rising and the eurozone at risk of falling into a damaging deflation cycle, the ECB is widely expected to find some way of loosening policy even further later this year, by injecting long-term liquidity into the banking system or US-style "quantitative easing." "Ireland's yields give an idea about where the Spanish and Italian markets should be," says John Beck, co-director of international bonds at Franklin Templeton, which owns more than €9bn of Irish bonds. In the years after the euro was launched in 1999, government bond yields converged. Greece's default in 2012 changed perceptions dramatically, however, limiting how much further spreads can fall. Investors, for instance, worry about the progress of reforms in Italy, and Italian yields have fallen less than Spanish equivalents. "We continue to treat Italy and Spain as credit risk and investors should be compensated for that - but the compensation for risk versus corporate credit looks reasonable and there is scope for spreads to tighten," says Andrew Balls, head of Pimco's European investment team. But investors have no handy guides to how low spreads could fall. "I'm unsure what appropriate spread levels are - you have to appreciate it is a political union as well as an economic union," says Mr Beck. Greece itself is likely to remain a special case, even if the near-8 per cent yield on its 10-year bonds appears attractive. The country's low credit rating keeps it off-limits for many investors. Its debt markets are illiquid and Greece's debt agency may need to engage in significant preparatory work before investors return en masse. Across the eurozone, meanwhile, a looming risk is of sentiment toward the euozone periphery turning negative again as US yields rise. US Treasuries provide a basis for pricing other assets globally; the danger in Europe is of interest rates rising prematurely on the back of US Fed policy actions. "That could be a problem in terms of growth," warns Mr Balls. The last thing Europe needs is higher interest rates. "Europe remains vulnerable to shocks," warns Trevor Greetham, director of asset allocation at Fidelity. The next big one could come from the gradual normalisation of US monetary policy. Additional reporting by Christopher Thompson