July 9, 2020 / 11:26 AM / a month ago

UPDATE 2-German bond yields fall to 1-week lows before EU summit

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds details)

By Yoruk Bahceli

AMSTERDAM, July 9 (Reuters) - German bond yields fell to a one-week low on Thursday as investors awaited fresh developments on a European Union recovery fund that aims to help the region’s economy rebound from the coronavirus pandemic.

Demand for bonds also grew as U.S. stocks fell more than 1% and the U.S. dollar regained lost ground against its rivals.

Hopes are high that the 750-billion-euro ($851.70 billion)fund will be approved at an EU summit late next week. Intended to offer mostly grants to the countries worst hit by the coronavirus, it has been one of the main drivers of a recent drop in Southern European borrowing costs, led by Italy.

On Wednesday, European Council President Charles Michel said the EU needed to reach an agreement quickly on the fund but much negotiation was still needed.

German Chancellor Angela Merkel and Dutch Prime Minister Mark Rutte were to give a joint news conference in Berlin at 1830 GMT.

“We don’t anticipate a fast agreement (little in the EU moves quickly), but would be cautious around putting too much weight on negative-sounding headlines, which are almost certain to be seen,” Mizuho analysts told clients.

“Instead, we stick to our expectation for a slow but inexorable grind towards a consensus relatively close to the Franco-German proposal,” they said, referring to a plan for 500 billion euros in grants. The EU later added 250 billion euros in loans to the plan.

On Thursday, Germany’s 10-year yield fell 2.5 basis points to -0.50%, its lowest level since end-June. Italian 10-year yields were unchanged at 1.28%.

Long-term gauges of euro zone inflation expectations fell to a week-and-a-half low at 1.10% after hitting their highest since early March and nearing 1.15% in late June. They remain above their record lows just above 0.70% in March.

The European Central Bank is prepared to get more innovative with its monetary policy tools if necessary, France’s central bank chief, a governing council member, said.

Italian banks increased their domestic government bond holdings in May to 434.1 billion euros from 419.3 billion in April.

In the primary market, Ireland sold 1.5 billion euros of 7-, 10- and 30-year bonds in an auction, the top of the range originally announced.

$1 = 0.8806 euros Reporting by Yoruk Bahceli Editing by Jane Merriman/Mark Heinrich

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