* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Recasts, adds Italy issuance, inflation, GDP and updates prices)
By Olga Cotaga
LONDON, May 29 (Reuters) – Italian government bonds stabilised on Friday after a new issuance and as investors waited for a European Commission rescue plan to take form, with yields across the euro zone mostly neutral.
Italy sold the full amount planned at a bond auction on Friday, paying lower yields, as it benefited from market optimism over a proposed recovery fund to offset the effects of the coronavirus pandemic.
The Treasury auctioned five and 10-year nominal BTP bonds paying respectively a three and a two-month low. Total orders were more than 10 billion euros against the 7.5 billion euros ($8.25 billion) sold.
The strong demand for Italian debt offset a 5.3% contraction in Italy’s economy in the first quarter from the previous three months, the steepest drop in gross domestic product since the current series began in 1995.
The European Commission proposed a 750 billion-euro recovery fund on Wednesday that would offer 500 billion euros in grants and 250 billion euros in loans to help coronavirus-hit economies.
While markets awaited the response from EU nations, investors wondered when the fund would be ready for use.
European Union leaders must approve it quickly to avert a long recession, Spain’s foreign minister said on Thursday.
Italy and Spain, hard-hit by the pandemic, rely on tourism and need the recovery fund to avoid tapping capital markets for funds and raising their debt levels.
Italian 10-year yields were flat at 1.43% close to 1.42%, an eight-week low. Italian bonds have benefited from the proposed EU recovery plans.
Interest rates overall in the euro zone market remained calm as month-end investment adjustments subdued activity.
German 10-year Bund yields were down 1.5 bps at -0.43% , with rest of the core market falling 1 to 2 bps.
German government bonds gained as U.S.-China tensions over China’s treatment of Hong Kong rattled investors.
European government bonds were mostly unchanged. Euro zone inflation fell to its lowest in nearly four years in May. That fall was expected, while German retail sales fell far less than expected in April.
“The Month-end rebalancing flow should help to flatten yield curves and push rates lower,” Padhraic Garvey, regional head of research at ING, said.
He added that effect would unwind at the start of June and he predicted spreads would remain tight for the foreseeable future as the European Central Bank is expected to announce more quantitative easing purchases next week. (Reporting by Olga Cotaga, editing by Larry King and Barbara Lewis)
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