Italian long-term yields parked around lowest since March ahead of EU summit

Long-term Italian government bond yields hovered around their lowest in months on Friday, the first day of a European Union summit during which member states are expected to vote on a 750 billion euro recovery fund. Some wealthier northern European countries are against providing the money via grants. Nonetheless, such an outcome would likely shrink the premium Italy has to pay to bond-holders, ING analysts said.

Long-term Italian government bond yields hovered around their lowest in months on Friday, the first day of a European Union summit during which member states are expected to vote on a 750 billion euro recovery fund. Opinions on the possible outcomes of the summit - likely known during the weekend - range from a deal being agreed close to what was proposed to no agreement, with a follow-up meeting at a later date.

ING analysts believe that some progress will be made this weekend, but that the final agreement will take place later, envisaging a compromise around a 600 billion euro package split in equal part between grants and loans. Some wealthier northern European countries are against providing the money via grants.

Nonetheless, such an outcome would likely shrink the premium Italy has to pay to bond-holders, ING analysts said. "We're expecting progress but, save for a few smaller countries, the benefit should fall short of a game changer. Still, the way is clear for further spread tightening," they wrote in a note to clients.

"In numbers, a swift agreement would push 10-year German-Italian yield spread towards our 150 basis point target by the end of the summer," they said. The Bund-BTP spread - the premium Italy pays over safe-haven German Bund yields - was last at 170 bps, close to the lower end of the trading range this year.

Italian 10-year yields were last up 1.1 bps at 1.25% , hovering around the 16-week low it fell to the day before, when the ECB reassured markets it would most likely use the full firepower of emergency bond purchases to tackle the economic hit from the coronavirus pandemic. German 10-year yields were steady at -0.46%.

The summit will stretch well into the weekend. ING analysts said they were not expecting much by way of soundbites during the Friday session, advising against acting on them.