(Correcting days in the first paragraph to Tuesday)
* Eurozone periphery government bond yields: tmsnrt.rs/2ii2Bqr
By Elizabeth Howcroft
LONDON, July 21 (Reuters) – Eurozone bonds were sold on Tuesday, with Italian yields rising again after reaching the lowest level since early March in early London trade after European Union leaders agreed on a massive coronavirus recovery fund to support the bloc.
The European Union approved 750 billion euros ($ 860 billion) in the early hours of Tuesday after a long summit that lasted nearly five days. The agreement was welcomed by the market as a significant step in shoring up the eurozone economy against the shock of COVID-19.
In a compromise agreement, the package will consist of 390 billion euros in grants – less than the previously targeted 500 billion euros – and 360 billion euros in cheap loans.
The economy that is driven by Italian tourism is among the most severely affected by this virus. Prime Minister Giuseppe Conte said that 28%, or 209 billion euros, would be for Italy, giving the country the opportunity to “start over with force”.
Yields on Italian 10-year government bonds, which have dropped 70 basis points in anticipation of funds since it was first proposed on May 18, fell further on Tuesday morning. It reached 1.117% – the lowest since the first week of March – before recovering to 1.172% at 1457 GMT.
It was set to end the day for the first time after seven consecutive falls.
The spread between core and peripheral yields was tightened, with 10-year German-Italian yields approaching the narrowest in four months before widening again to around 162 basis points. .
“With protracted negotiations being avoided, we see the way cleared for the 10Y Italy-Germany deployment through our 150bp target this summer,” ING strategists wrote in a note to clients.
“The benefits of bringing in peripheral debt, and lower prospective volatility thanks to ECB intervention, make it a superior alternative to core bonds, in our view.”
The spread of Portuguese and Greek in Germany is also getting tougher.
German, French and Dutch results edged up around 1 basis point but were largely unchanged by the news. The German 10-year yield is at -0.454%, after moving in a narrow range of 12 bps so far this month.
“It is possible that the extraordinary non-compliance of the Bunds in the face of peripheral rally reflects the fact that the division of responsibilities promised by the IMF is even more tokenistic than it appears,” wrote Rabobank-level strategists.
The market takes confidence not only from the size of the fund itself but also from demonstrations of solidarity and debt sharing between EU countries.
But European Central Bank Vice President Luis de Guindos said on Tuesday that a new wave of the coronavirus crisis in areas such as the United States, Latin America and parts of Asia could reduce European growth.
ECB board member Isabel Schnabel was quoted on Tuesday as saying that investors should not read too much about decreasing ECB bond purchases, because they could increase later. He said that the ECB would likely use the entire bond purchase quota. ($ 1 = 0.8707 euros)
Reporting by Elizabeth Howcroft; Editing by Alison Williams