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Financials

CORRECTED-UPDATE 3-Italian risk premium returns towards pre ECB emergency purchase levels

(Corrects headline from April 15 report to say German-Italian spread moved TOWARDS, not TO, levels pre-ECB support Bund yields fall to two-week low)

* Italian bonds give up gains from ECB support

* Bund yields fall to two-week low

* German auction successful; Greece sells first bond since ECB eligibility

LONDON, April 15 (Reuters) - Italian bonds gave up all the gains they made since the European Central Bank launched an emergency stimulus programme to tackle the economic impact of coronavirus, as investor concerns about the lack of a coordinated euro zone response deepened.

The country’s debt came under further pressure on Wednesday as disappointment with the Eurogroup’s response package continued and the announcement of changes to its funding programme, which increased the prospect of Rome adding to its debt pile.

Euro zone finance ministers agreed a half-a-trillion euro plan to support coronavirus-hit economies last week. However, to the disappointment of several states led by Italy, the deal did not mention using joint debt to finance the economic recovery.

Without joint debt issuance, coronavirus stimulus would only add to the debt of Southern European states, which has raised concern about debt sustainability, particularly in Italy.

The gap with Germany’s 10-year bond yield, effectively the risk premium Italy pays investors, rose as high as 240 bps , the highest since March 19, which was the day after the ECB announced its Pandemic Emergency Purchase Programme, before which the premium had risen as high as 319 bps. It was last at around 222 bps.

Italy’s 2-year bond yield rose to as high as 1.15%, breaching the 1% level for the first time since the programme was announced. It was last up 5 basis points at 1.098% . 10-year yields were last flat at 1.912% after rising to nearly 2% earlier.

“I’m surprised the ECB with PEPP and all the flexibility they have in this programme would allow spreads to widen that much over 200 basis points,” said Antoine Bouvet, senior rates strategist at ING.

“Either they haven’t been intervening in the market this week...or the scale of the selling on the other hand is so big that ECB buying doesn’t absorb this selling,” he said, noting that data to show the ECB’s purchases this week is not available yet.

Italy will hold larger debt auctions and may resort to more costly syndicated placements for shorter-dated bonds as it ramps up spending to fight the health crisis, the Treasury said on Tuesday, although this was already largely priced in, analysts said.

Other Southern European sovereigns have also come under pressure.

The risk premium on Spain’s 10-year bonds also rose nearly 30 bps over the last two sessions, also giving up gains since the PEPP programme announcement.

“If we were to erase all those gains since the announcement of the PEPP that would be a very clear signal that the liquidity support promised by the ECB’s beefed up QE program is no longer sufficient to offset concerns on a sovereignty front, on a debt metric front,” said Richard McGuire, head of rates strategy at Rabobank.

“To unwind all of those gains I think will trigger a notable further widening of the spread beyond that.”

Joint debt issuance is still a possible response, Eurogroup President Mario Centeno told Italy’s Corriere della Sera daily.

Higher-rated safe-haven yields edged lower as the economic damage from the coronavirus pandemic kept global markets under pressure. Germany’s 10-year benchmark was flat at -0.458% after falling to two week low.

In the primary market, Germany sold 0.82 billion euros in a top-up of its 30-year bund, seeing higher demand than the previous auction on March 18.

France also plans to issue a record 245 billion euros ($267.1 billion) in medium and long-term debt this year, revised up from 210 billion euros expected last month and an original target of 205 billion.

Greece is set to sell 2 billion euros of seven-year bonds in its first sale since its debt became eligible for ECB purchases.

Elsewhere, interbank borrowing costs continued to fall. The three-month Euribor fixing edged down to -0.250% in a further sign that the benchmark may be starting to respond to ECB measures aimed at easing the funding rush across the bloc.

Reporting by Yoruk Bahceli and Olga Cotaga; Editing by Angus MacSwan

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