UPDATE 1-Italian bonds react little to hawkish counter-proposal to recovery fund

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices, adds comments)

By Yoruk Bahceli

LONDON, May 20 (Reuters) – Italian bond yields held near multi-week lows on Wednesday, despite the prospect of a hawkish counter-proposal to a plan for a recovery fund offered by France and Germany.

A group of European Union states will propose funding coronavirus recovery efforts with loans, not grants, as the Franco-German plans for a 500 billion-euro fund call for, Austrian Chancellor Sebastian Kurz said on Tuesday. His Dutch, Danish and Swedish counterparts agree, Kurz said.

But Italian and southern European bond yields – which tumbled after the announcement of the Franco-German proposal on Monday – showed little reaction.

“I wouldn’t underplay the significance of the developments. The fact that Germany, at least (Chancellor) Angela Merkel, is willing to cross the red line of a de facto pooling of finances, is certainly very, very significant,” said Richard McGuire, head of rates strategy at Rabobank in London.

Italy’s 10-year bond yield was up only 1 basis point at 1.65%, near the five-and-a-half-week lows reached after France and Germany made their proposal. It is down 20 basis points compared to the start of the week.

The risk premium it pays – the gap with Germany’s 10-year yield – was at 210 basis points, close to Tuesday’s five-week lows.

Safe-haven German 10-year yields fell 1 basis point to -0.47% but are up 6 basis points this week.

Elsewhere Germany raised 4 billion euros via a re-opening of a 10-year bond, while France issued 11.24 billion euros of three-year, six-year and inflation-linked bonds.

Focus was also on the allotment of the European Central Bank’s first PELTRO – its emergency loan scheme announced last month as part of its efforts to cope with the coronavirus pandemic, where 851 million euros were allotted, even less than the small take-up analysts expected. (Reporting by Yoruk Bahceli, editing by Larry King and Timothy Heritage)

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