Italian bond yields fall as EU leaders seek joint financing to fight coronavirus

* Euro zone govt bond yields

By Olga Cotaga

LONDON, April 23 (Reuters) – Italian government debt yields fell on Thursday after European Union leaders agreed the day before to move towards joint financing of a recovery after the coronavirus pandemic.

Italy’s yields and the risk premium it pays on its debt rose on Wednesday amid uncertainty over how the already heavily indebted country will pay for its stimulus plans.

But EU leaders will ask the European Commission to propose a fund big enough for the job, which targets the most affected sectors and regions, including Italy.

They will meet on Thursday to discuss ways to finance aid to help economies recover from the coronavirus pandemic and the lockdowns imposed to fight it.

Italian yields also fell because the European Central Bank said on Wednesday it would let banks post collateral that was downgraded to junk during the coronavirus outbreak, to prevent a credit squeeze in the euro zone.

With the euro zone economy reeling, Italy is in danger of losing its investment-grade credit rating. That would have kept banks from using those assets to finance themselves at the ECB, raising their borrowing costs.

EU leaders are likely to give the EU executive arm until around the end of April to decide the size of the recovery fund and how to finance it. The sums floated before the summit are huge, ranging from a trillion to several trillion euros. How to raise the funds and whether they should be loans or grants are contentious issues.

The prolonged negotiations over the economic package was “classic Europe”, said Iain Stealey, international CIO for fixed income at J.P. Morgan Asset Management.

“It naturally takes a bout of volatility and stress for everyone to come together … Ultimately there will be a commitment to come together,” he said.

Italian two-year government bond yields were down 6.1 basis points at 0.997%, having fallen earlier as much as 12 bps to 0.94%, the lowest since Monday. A day earlier, they rose as high as 1.257%. Ten-year yields also fell, by 5.5 bps to 2.052%.

“We expect we will see tighter Italian spreads over the longer term. But we might see higher spreads in the near term,” Stealey said.

Elsewhere, Italy’s economy minister said on Thursday he expected a “strong rebound” in output in the third quarter of the year and significant growth in 2021, after contraction caused by measures to fight the coronavirus.

Yields in core euro zone markets rose, on the other hand, with German 10-year Bund yields up 1.6 bps at -0.403% .

Germany’s coalition parties on Thursday agreed to further measures worth some 10 billion euros ($10.81 billion) to protect its workers and companies. Germany has already approved an initial package worth over 750 billion euros, with the government taking on new debt for the first time since 2013. (Reporting by Olga Cotaga; Additional reporting by Tommy Wilkes)

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