UPDATE 2-Italian bond yields up, not far from recent low

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds Spanish issuance and updates prices)

By Olga Cotaga

LONDON, May 21 (Reuters) – Italian government 10-year bond yields rose on Thursday from a near six-week low reached this week as nervous investors awaited more detail to emerge from the proposed 500 billion euro ($547.90 billion) European Union recovery fund.

Amid continued uncertainty over whether the fund will be financed by grants or loans, the 10-year BTP yield was up 4.5 basis points at 1.68%, though not far from the 1.59% low it touched on Tuesday.

The premium Italy pays over the benchmark German 10-year Bund yield rose slightly as well to 213 bps.

Italy said on Thursday it was keeping unchanged at 1.4% the real coupon for its new ‘BTP Italia’ inflation-linked bond, after the issue raised more than 14 billion euros from small savers in the past three days.

Spanish 10-year bond yields inched higher too by 4 bps at 0.75%.

Spain has issued a total of 6.9 billion euros of bonds in three-year, five-year, 10-year and 2066 lines to strong demand, particularly in the two shorter-term bonds.

“The initial proposal (of a recovery fund) from Germany and France was seen as proactive, but at the same time there was opposition from other countries, offering counterproposals. Some headwinds to the idea already, so I guess markets are accepting that there will be ongoing political discussion around that,” said Rainer Guntermann, rates strategist at Commerzbank.

A group of EU states will propose funding coronavirus recovery efforts with loans, not grants as the Franco-German plan calls for. “The discussion is still early days, that’s why markets tread water,” Guntermann said.

Spanish yields were inching higher partly because there is an option for Spain to issue a 50-year government bond, “so quite a bit of duration,” he added.

In core European markets, yields were falling mostly by 1 to 2 bps, with safe-haven German 10-year government bond yields down 1 bps at -0.47%.

Investors turned more risk-off after the World Health Organization said there were 106,000 new cases of the new coronavirus recorded worldwide in the last 24 hours – the most in a single day yet.

Global coronavirus infections surpassed 5 million on Wednesday, with Latin America overtaking the United States and Europe in the past week.

Yields maintained similar levels even though the devastating impact of the coronavirus on the euro zone economy abated a little this month, a survey showed.

Having crashed to what was by far its lowest reading in the survey’s nearly 22-year history last month, IHS Markit’s Flash Composite Purchasing Managers’ Index, seen as a good gauge of economic health, recovered to 30.5 from April’s 13.6. ($1 = 0.9126 euros)

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