Italian bond yields set for biggest weekly fall in 8 weeks

* Euro zone periphery govt bond yields

LONDON, May 22 (Reuters) - Italian 10-year government bond yields were set for their biggest fall in eight weeks, boosted by a European Union recovery fund proposal that could provide grants to help the highly-indebted country’s coronavirus-hit economy.

Bond investors had hoped for some form of EU joint effort to tackle the costs of fighting the coronavirus pandemic, as the financing for the proposed fund would not count towards Italy’s already hefty debt burden.

The proposal helped to push Italy’s 10-year bond yield down 22 basis points this week, its largest weekly fall in eight weeks.

“The proposal as it stands is unambiguously positive for the BTP market. It’s good for peripherals, in some ways it good for banks, but let’s see what the details are,” said Mark McDonnell, a macro analyst at Invesco.

“The market must be optimistic, but I think there is a little bit of concern priced in there as well. We’ve been here before and it’s not going to be easy to get everyone on board.”

The spotlight is on a group of European Union states opposed to big spending by the bloc, which will present a counter-proposal to the Franco-German plan and whether there may be adjustments to the proposal, for example, such as providing some funds as loans rather than grants.

Investors will also watch out for the European Commission’s own proposal for a recovery fund, due next Wednesday.

On Friday, euro zone bond yields were little changed in early trade. Germany’s 10-year benchmark was down 1 basis point to -0.51%. Italian 10-year bond yields were unchanged at 1.63%.

Bonds were not much moved by China’s decision to skip setting a 2020 gross domestic product growth target - the first time it has not set a target since it began publishing the metric in 1990. They also did not react much to the flare-up in U.S.-China tensions over Chinese security measures in Hong Kong, which hit world stocks.

Analysts will be watching the release of the European Central Bank’s meeting minutes from April expected later on Friday.

However, that meeting preceded the German constitutional court ruling that gave the country’s central bank three months to prove that the ECB’s conventional bond buying scheme was necessary and proportional.

Reporting by Yoruk Bahceli. Editing by Jane Merriman