May 21, 2020 / 8:47 AM / 11 days ago

UPDATE 3-Italian bond yields hold steady, focus on recovery fund

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds details on Spain, updates prices)

By Olga Cotaga

LONDON, May 21 (Reuters) - Italian government 10-year bond yields held near six-week lows on Thursday as investors awaited more information about the proposed 500 billion euro ($547.90 billion) European Union recovery fund.

Amid uncertainty over whether the fund will be financed by grants or loans, the 10-year BTP yield was unchanged in late trade at 1.64%, not far from the 1.59% low it touched on Tuesday after the announcement of the fund on Monday.

The premium Italy pays over the benchmark German 10-year Bund yield rose marginally to 210 bps.

“The initial proposal (of a recovery fund) from Germany and France was seen as proactive, but at the same time there was opposition from other countries, offering counterproposals. Some headwinds to the idea already, so I guess markets are accepting that there will be ongoing political discussion around that,” said Rainer Guntermann, rates strategist at Commerzbank.

A group of EU states will propose funding coronavirus recovery efforts with loans, not grants as the Franco-German plan calls for.

“The discussion is still early days, that’s why markets tread water,” Guntermann said

Italy raised a record 22.3 billion euros from a BTP Italia inflation-linked bond targeted at retail investors this week, outperforming the last such issue in October and exceeding already high expectations for the new sale.

Elsewhere in the primary market, Spain issued a total of 6.9 billion euros of bonds in three-year, five-year, 10-year and 2066 lines to strong demand, particularly in the two shorter-term bonds..

Its economy ministry said it will raise net borrowing on financial markets to 130 billion euros this year to pay for coronavirus-linked spending, 97.5 billion euros more than the original amount planned.

A ministry source told Reuters it was too early to decide if Spain would tap the proposed recovery fund, given the ongoing discussions over whether it will offer grants or loans.

In core euro zone markets, safe-haven German 10-year government bond yields were down 3 bps at -0.50%.

Investors turned more risk-off after the World Health Organization said there were 106,000 new cases of the new coronavirus recorded worldwide in the last 24 hours - the most in a single day yet.

Yields maintained similar levels even though the impact of the coronavirus on the euro zone economy abated a little this month, according to flash PMIs.

Having crashed to what was by far its lowest reading in the survey’s nearly 22-year history last month, IHS Markit’s Flash Composite Purchasing Managers’ Index, seen as a good gauge of economic health, recovered to 30.5 from April’s 13.6. ($1 = 0.9126 euros)

Reporting by Olga Cotaga; additional reporting by Yoruk Bahceli Editing by Mark Heinrich and Andrew Heavens

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