Euro zone bond yields stable in aftermath of EU proposal

Euro zone bond yields were stable early on Thursday, with Italian yields holding near eight-week lows, amid optimism over a European Union proposal for recovery fund to offset the effects of the coronavirus pandemic. The EU's executive arm, the European Commission, proposed a 750 billion-euro recovery fund on Wednesday that would offer 500 billion euros in grants and 250 billion euros in loans to help its coronavirus-hit economies recover.

The news boosted southern European bonds -- and Italian debt in particular -- with the possibility of grants that would ease pressure on Italy's debt. Focus remained on the fund on Thursday and Italy's bonds remained near those levels. The 10-year yield was down 1 basis point to 1.47%, a touch higher than the eight-week lows at 1.46%.

"With the release now of the European Commission’s plan for COVID recovery, we see there being room for further positivity in Eurozone risk assets, even while the global sentiment is buffeted by China-related tensions," Mizuho analysts told clients. "This feeds directly into our expectations for European risk assets to out-perform, which will be further helped by a likely expansion of ECB QE next week."

Markets largely expect the European Central Bank to increase its bond purchases when it meets on June 4. French Finance Minister Bruno Le Maire said on Thursday that he hoped the EU could reach agreement on the commission's proposed recovery fund in the coming weeks.

Austria said on Wednesday the proposal is a starting point for negotiations, but repeated a preference for loans. Germany's 10-year benchmark yield was down 2 basis point at -0.44%, ahead of national inflation figures due at 1200 GMT.

Inflation eased in some German states in May, suggesting the national reading will also decelerate and remain below the ECB's target, providing further justification for the extra stimulus expected next week. The German economy is likely to shrink by 6.6% this year as a consequence of the coronavirus crisis before growing by 10.2% in 2021, the Ifo Institute said on Thursday.

Euro zone economic sentiment recovered less than expected in May, when governments began easing coronavirus lockdowns, data showed.