May 27, 2020 / 7:27 AM / a month ago

Euro zone bond yields edge down; focus on EU recovery fund

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

LONDON, May 27 (Reuters) - Euro zone government bond yields edged down on Wednesday, easing off from Tuesday’s highs, as investors waited for proposals about the EU recovery fund which are due to be presented the European Parliament.

The European Commission will announce a plan to help the EU economy recover from its coronavirus slump with a mix of grants, loans and guarantees exceeding 1 trillion euros that raised controversy even before it was announced.

Hopes for a co-ordinated fiscal response to the coronavirus crisis have been boosted since France and Germany made proposals for a 500-billion-euro recovery fund.

European Commission President Ursula von der Leyen is expected to present a proposal for the EU recovery fund to the European Parliament later on Wednesday.

“The French-German proposal was a bold move that crosses a previous red line in Europe: joint fiscal responsibility. However, four northern European states - Austria, Denmark, the Netherlands and Sweden - have tabled an alternative proposal that would only offer loans, rather than grants,” Marshall Gittler, Head of Investment Research at BDSwiss Group, wrote in a note to clients.

“Given the absence of any common ground between the two plans, all eyes will be on the EC to see how they square the circle or instead come down on one side or the other – or fail to, as the case may be,” he wrote.

The German 10-year government bond yield, which on Tuesday hit a one-month high, eased slightly, last down 2 basis points at -0.442%.

Italy’s 10-year government bond yield, which on Tuesday fell to a seven-week low as risk assets rallied during as global risk appetite improved, was little changed, last at 1.552% .

The Italian-German 10-year yield spread held near six-week lows at 199.30 bps. It fell below 200 bps on Tuesday for the first time since mid-April.

On Tuesday, sources told Reuters that the ECB was drafting contingency plans to carry out its multi-trillion bond-buying programme without the Bundesbank in case Germany’s top court forces the main participant in the scheme to quit

But in an interview with the Financial Times published on Wednesday, ECB executive board member Isabel Schnabel said that the German constitutional court’s ruling will not directly affect the ECB and will not lead to the Bundesbank having to exit the scheme.

Schnabel also said the ECB would be willing to expand any of its tools if it judges that further stimulus is needed.

“With EU solidarity hopes set to get another boost today and ECB-expectations running high we stick with our short bias in Bunds,” Commerzbank rates strategists wrote in a note to clients.

Reporting by Elizabeth Howcroft; Editing by Angus MacSwan

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