THE Irish Government bond market appears at long last to have decoupled from its British counterpart. In just five days last week the market attracted investment of 25 per cent of its value or £3.5 to £4 billion and the flows are continuing this week.

This has led to long-term interest rates falling below British levels and towards those prevailing in Germany, a trend which if sustained would mark a fundamental shift in sentiment.

Up until recently the market "turned over" - traded a volume of stock equivalent to the size of the market - a maximum of six times over a year, so the recent trading volumes are remarkable. If it continued the market would turn over 12 times this year.

But where is the money coming from and is it sustainable? Most Irish analysts point to huge inflows from German, British and US funds although domestic institutions have also been very active.

There are a number of reasons for the interest. First and foremost, for a few weeks Irish stockbrokers have been plugging the view to anyone who will listen that Irish Government bonds, or gilts, are cheap relative to the core states of Continental Europe.

One reason is the view internationally that Ireland now looks likely to be a monetary union candidate from the outset. And it seems the international funds and institutions have now taken on board our strong economic performance.

There is also a growing realisation that Ireland is likely to meet the Maastricht Treaty criteria, according to Dr Dan McLaughlin, chief economist at Riada Stockbrokers. Many foreign investors are thus putting on convergence trades", where they are betting that Irish bond yields - or long-term interest rates - will have to fall to close on German levels in the run-up to monetary union.

As a result, Irish bond interest rates have fallen significantly closer to German bonds - known as bunds. The difference between the two is now 1.21 percentage points on 10-year bonds, compared to 1.50 points only two weeks ago. The same story is true of five-year gilts - over one month they have narrowed over one third of a point.

At the same time, the Irish market has failed to move in tandem with Britain, for the first time since the currency crisis in 1992/93. The Irish bond market is now trading 0.8 points below the British market in the five-year area, from 0.25 at end of March.

One of the sparks for the decoupling was the BSE crisis in Britain. "When the BSE scare was at its height we went off with Britain," said Mr Dermot O'Brien, economist at NCB. "People eventually saw that there was no good reason for this," and started to reinvest in Ireland.

Another reason for the market's recent strong performance is the marketmaking system which came in formally on December 1st, 1995.

"The marketmaking system increased interest and thus liquidity," said Mr O'Brien. "They know they can deal more easily than on agency system."

The National Treasury Management Agency (NTMA) has not been slow to take advantage of this increased institutional interest. In the first three weeks of April it raised £75 million in the market, the same amount as it managed in the entire first quarter.

Mr Michael Horgan, deputy manager of domestic funding at the NTMA admitted that. the agency is "taking advantage and doing a little bit extra".

He refused to divulge how much more the agency intends to raise this year but said it hoped to have around £400 million surplus as well as enough to cover a £1 billion fund-raising in July and £470 million in September.

The agency will also be repaying at least as much as the £650 million in foreign debt it managed last year.

Can anything go wrong and reverse the positive sentiment towards the Irish market? One risk is overheating in the Irish economy, a constant fear for the bond investor. So far there are no signs of significant inflationary pressures and the inflow of money is also strengthening the pound against sterling, with most analysts now agreed that 104p looks likely in the short term. This would act as a disinflationary brake.

It is also possible that another reverse in thinking on EMU could hit the market. For the moment investors have decided that the political will to implement monetary union is likely to overcome any economic arguments in favour of caution.

Although it is still likely that sentiment will ebb and flow in the long term, most market watchers now believe it is likely to go ahead with or without Britain. However in the notoriously short-term world of the financial markets, such views can quickly change.