Bonds News

UPDATE 2-Italy's bond yields rise to one-month highs as EU rescue plan disappoints

* Euro zone periphery govt bond yields (Adds link to Euribor story, updates prices)

LONDON, April 14 (Reuters) - Italian bond yields rose on Tuesday to their highest in almost a month, reflecting some disappointment in markets over a half-trillion-euro coronavirus rescue plan agreed by euro zone finance ministers late last week.

The agreement includes almost unconditional use of the euro zone’s European Stability Mechanism (ESM) bailout fund for loans to governments, to allow them to subsidise wages so that companies can cut working hours rather than jobs, and a plan for the European Investment Bank to step up lending to companies.

Italian Prime Minister Giuseppe Conte on Friday said that providing cheap loans from the euro zone bailout fund was a “totally inadequate tool” and Italy had no intention of applying for help from the ESM.

Analysts said the measures had helped peripheral bond spreads, but without meaningful steps towards fiscal union in the longer term, upward pressure on the borrowing costs of weaker states would return.

“Italian spreads reflect disappointment that Italy might not use the ESM facility,” said Antoine Bouvet, senior rates strategist at ING.

“There is a stigma attached to using the ESM facility -- it doesn’t play well on the domestic scene. Also, we had these headlines with big numbers, but the ESM part is worth a small amount.”

Italy’s two-year bond yield rose around 24 basis points to around 0.90% -- its highest level since March 18, when fears around the impact of the novel coronavirus on Italian public finances were at their peak.

Ten-year Italian bond yields were 20 bps higher at 1.80% . The gap over German Bund yields was at 209 bps -- more than 20 bps wider than levels seen late on Thursday before European markets closed for the long Easter weekend.

Germany’s benchmark Bund yield was around 3 bps lower at -0.37%.

The euro zone deal, announced just before the Easter break, made no mention of using joint debt to finance recovery, an approach favoured by Italy, France and Spain but bluntly opposed by Germany, the Netherlands, Finland and Austria.

European Commission Vice President Valdis Dombrovskis told the German newspaper Handelsblatt that the EU could finance a recovery fund worth up to 1.5 trillion euros ($1.64 trillion) with bonds guaranteed by member states.

But analysts said that, without further steps towards fiscal unity, investors would increasingly differentiate between the bloc’s weaker and stronger members -- creating upward pressure on the borrowing costs of highly-indebted states such as Italy.

“Fundamentally, the structural problem of solvency has not been resolved,” said Nicolas Forest, global head of fixed income at Candriam.

“(Jointly issued) euro bonds are being postponed and, without debt pooling, the solvency of peripheral debts will remain a problem for the next few years.”

Analysts at Mizuho said in a note that “with little sign of joint issuance, Italy still looks fragile in the long term”.

Meanwhile, euro zone money market rates inched lower on Tuesday from four-year highs, a sign that the Euribor benchmark may be starting to respond to European Central Bank measures aimed at easing a funding crunch across the currency bloc.

Reporting by Dhara Ranasinghe; editing by Larry King