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LONDON (Reuters) - Irish bonds are set to continue outperforming euro zone peers after topping the returns table in the first quarter while the political stalemate in Italy could mean more disappointment for its holders of its debt.
Graphics published by Reuters on Thursday showed year-to-date returns on Irish bonds across all maturities .QW8G at 4.84 percent, the highest of any sovereign included in Markit's iBoxx EUR benchmark index, one of the most tracked indexes by bond investors worldwide.
"They're certainly going to be up there (at the end of the year)," said David Keeble, global head of fixed income strategy at Credit Agricole. "I'm sure Ireland is going to sell a few more bonds this year and will be returning to their usual market access. I can't see any negative coming from the Irish story."
That contrasted with a return of just 0.66 percent .QW4AP on Italian bonds in the first quarter. They had returned 11 percent in the same period of last year and more than 20 percent in 2012 as a whole.
While analysts see Irish paper at the top of the charts at the end of the year as well, they say any returns from Italy will depend on whether the country can overcome a political crisis following by last month's inconclusive election.
Investors are piling into Ireland's debt market, betting that the country - one of the lowest rated in the euro zone - will successfully complete the 85 billion euro bailout deal it took in 2010 and return to the market with regular auctions.
Dublin issued its first benchmark 10-year bond since the bailout earlier this month, a deal that was heavily oversubscribed, contributing to a strong rally in Irish bonds and helping them to weather shocks from elsewhere in the region.
Ireland's performance this year compares with returns of over 10 percent in the first quarter of last year and almost 30 percent for the whole of 2012.
A sharp drop in returns is seen across all high-yielding euro zone bonds, as most of their recent gains occurred in the second half of 2012 after European Central Bank President Mario Draghi said he would do "whatever it takes" to save the euro.
Second-placed among the iBoxx EUR benchmark's index top-performing sovereigns was Spain. Its bonds offered a return of 3.3 percent in the first quarter of 2013 .QW8MP as Madrid eased concerns it will need a bailout with a series of strong debt auctions early this year.
That compared with a return of just above 1 percent in the first quarter of last year and 5.7 percent for whole-year 2012.
Italy's was perhaps the most unexpected performance given its solid 2012.
The bonds have been shaken by political uncertainty after a February 24-25 election produced a hung parliament, raising fears any future government may not have the necessary political backing to reform the stagnant and highly indebted economy.
Their performance this year is only slightly better than the 0.2 percent return .QW3AP seen on German bonds, viewed as the euro zone's safest asset, while the risks of holding Italian paper are perceived to be much higher. Whether they can catch up with Ireland or will become one of the worst performers in the euro zone this year depends on the political situation.
"Italy's underperformance is related to the elections," said Gianluca Ziglio, executive director of fixed income research at Sunrise Brokers. "I'm very bearish going forward ... Italy is a Titanic heading at a decent speed towards the iceberg."
Reporting by Marius Zaharia; Editing by Catherine Evans