Italian bonds react little to hawkish counter-proposal to recovery fund

Italian bond yields held near multi-week lows on Wednesday, despite the prospect of a hawkish counter-proposal to a plan for a recovery fund offered by France and Germany. A group of European Union states will propose funding coronavirus recovery efforts with loans, not grants, as the Franco-German plans for a 500 billion-euro fund call for, Austrian Chancellor Sebastian Kurz said on Tuesday. His Dutch, Danish and Swedish counterparts agree, Kurz said.

But Italian and southern European bond yields - which tumbled after the announcement of the Franco-German proposal on Monday - showed little reaction. "I wouldn't underplay the significance of the developments. The fact that Germany, at least (Chancellor) Angela Merkel, is willing to cross the red line of a de facto pooling of finances, is certainly very, very significant," said Richard McGuire, head of rates strategy at Rabobank in London.

Italy's 10-year bond yield was up only 1 basis point at 1.65%, near the five-and-a-half-week lows reached after France and Germany made their proposal. It is down 20 basis points compared to the start of the week. The risk premium it pays - the gap with Germany's 10-year yield - was at 210 basis points, close to Tuesday's five-week lows.

Safe-haven German 10-year yields fell 1 basis point to -0.47% but are up 6 basis points this week. Elsewhere Germany raised 4 billion euros via a re-opening of a 10-year bond, while France issued 11.24 billion euros of three-year, six-year and inflation-linked bonds.

Focus was also on the allotment of the European Central Bank's first PELTRO - its emergency loan scheme announced last month as part of its efforts to cope with the coronavirus pandemic, where 851 million euros were allotted, even less than the small take-up analysts expected.