Italian yields hover at 3-month lows as traders eye talks in Brussels

Investors in Italian bonds hope it will be given as grants rather than loans, helping an economic recovery in southern European countries and easing worries that they could be saddled with even more debt. "We currently have some thoughts and hopes that there could be a breakthrough concerning the recovery fund," said Daniel Lenz, rates strategist at DZ Bank, adding the European Commission is planning to release an updated proposal for the recovery fund.

Italian 10-year government bond yields were clinging to recent three-month lows on Tuesday as traders awaited signs of progress from talks this week in Brussels on a European recovery fund. On Wednesday, German Chancellor Angela Merkel will travel to Brussels to further discuss the fund. Investors in Italian bonds hope it will be given as grants rather than loans, helping an economic recovery in southern European countries and easing worries that they could be saddled with even more debt.

"We currently have some thoughts and hopes that there could be a breakthrough concerning the recovery fund," said Daniel Lenz, rates strategist at DZ Bank, adding the European Commission is planning to release an updated proposal for the recovery fund. Some European countries such as Austria have raised concerns about the 750 billion euro fund being offered as grants rather than loans. The European Commission is soon expected to released an updated proposal on the fund.

Italian 10-year BTP yields were last flat at 1.31% , not far from 1.25%, the three-month low they last fell to on Friday. German 10-year Bund yields were also trading neutral at -0.42%, having touched earlier a six-day low of -0.457%.

Greek 10-year government bonds on the other hand fell to $1.129, their lowest since Feb. 26. Analysts said the fact that the euro zone agreed on Tuesday new debt relief measures for Greece worth about 750 million euros ($840 million) helped the broader sentiment, but most likely did not cause the fall. Rainer Guntermann, rates strategist at Commerzbank, stressed the difficulty of interpreting day-to-day moves on Greek debt, given the uncertainty around how much the European Central Bank is buying on the day and the illiquidity of Greece's debt market, one of the smallest in the euro zone.

"I don't think there was surprise in these measures," he said of the debt relief announcement, which he added was not large enough to justify Tuesday's rally. The Greek bond market is seen as illiquid by most analysts given that a combination of low bond volumes and a low credit rating keeps most institutional investors away.

"Most pension funds, asset managers, central banks and insurance companies...will have official minimum rating requirements based on Moody's, Fitch and S&P, but then they'll also have an internal meeting on it as well," said Lyn Graham-Taylor, fixed income strategist at Rabobank, adding "none of the clients Rabobank deal with would ever buy" Greek bonds. Elsewhere, Austria sold 920 million euros in 10-year bonds and 460 million euros in 50-year bonds issues in the primary market.

Germany also raises 585.4 million euros via a 10-year inflation-linked bond. On top of that, France hired a syndicate of banks for the sale of a 15-year inflation-linked bond, according to a lead manager notice seen by Reuters. The deal will be launched "in the near future, subject to market conditions", a phrase usually used a day before a sale.

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