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UPDATE 2-Euro zone bonds react little to recovery fund veto; Italy to sell dollar bond

* Yields stable after Hungary, Poland veto recovery fund

* Italy to sell U.S. dollar bond after a year

* ESTR reverses last week’s sharp rise (Adds quote, updates prices and adds latest news)

AMSTERDAM, Nov 17 (Reuters) - Euro zone bond yields showed little reaction to Hungary and Poland’s veto of the European Union’s budget and recovery fund on Tuesday, while Italy was due to sell a U.S. dollar bond.

Hungary and Poland blocked the adoption of the EU’s 2021-2027 budget and recovery fund on Monday over a clause that ties funds to respect of the rule of law.

Although the fund is among the factors that have supported investor appetite for government bonds from Southern European countries, the fund’s main beneficiaries, they were undeterred by the news.

Attention was also on issuance as Italy said it would raise $3 billion from a five-year U.S. dollar bond sale on Tuesday, on the back of $9.25 billion of investor demand, a lead manager memo seen by Reuters showed.

“It looks like Italy wants to have a yield curve in dollars. Adding a five-year… looks to be part of that strategy,” said Andy Cossor, a strategist at DZ Bank in Frankfurt.

Italy’s 10-year benchmark yield was last down 1.5 basis points on the day at 0.60%. Other Southern European bond yields were also lower, with Greek 10-year yields touching a new record low at 0.68%.

Italy last issued U.S. dollar bonds in October 2019, when it raised $7 billion from five, 10 and 30-year bonds in the first such issuance since 2010.

The closely-watched gap between Italian and German 10-year yields - effectively the risk premium on Italian debt - was near its lowest since early 2018 at around 115 basis points.

Cossor said the lack of market reaction reflected the view the EU would broker a compromise.

The German EU presidency and the French government expressed confidence a solution would be found.

Safe-haven German 10-year bond yields fell 1.8 bps on the day at -0.56%.

Some analysts said worries around the recovery fund may have limited Monday’s bond sell-off in the reaction to news from U.S. drugmaker Moderna, which, following on from Pfizer’s announcement last week, also reported its experimental COVID-19 vaccine was more effective than expected.

But an effective vaccine will not fundamentally change European Central Bank economic projections, ECB President Christine Lagarde told a Bloomberg event on Tuesday.

Germany also visited the primary market, raising 4.125 billion euros via the auction of a new two-year bond.

In the money markets, ESTR, an overnight borrowing rate compiled by the ECB, continued to dip, Tuesday’s reading of -0.558% based on Monday activity showed, reversing a sharp rise in Friday’s reading that pushed it to its highest since July. (Reporting by Yoruk Bahceli; editing by David Evans and Barbara Lewis)