* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices; adds chart)

By Yoruk Bahceli

AMSTERDAM, July 13 (Reuters) – Italy’s 10-year government bond yield rose to its highest in over a week on Monday, as investors stayed cautious ahead of a European Union summit at the end of the week.

Investors hope the EU 27 will make progress in agreeing a 750 billion euro ($848.78 billion) COVID-19 recovery fund. Markets have moved in support of the fund, most of which has been proposed as grants to the worst-hit states such as Italy, sending that country’s debt rallying in recent weeks.

But opposition looms from states that oppose grants, such as the Netherlands and Austria. European Council President Charles Michel offered a proposal on Friday to make the fund more palatable. The hawkish states welcomed the move, but said more work was needed. The Netherlands said it would seek guarantees on budget reforms during negotiations this week.

Italy’s 10-year yield rose to its highest since July 3 at 1.33% in early trade. It was last up 2 basis points (bps) at 1.31%

“I don’t see any major topic driving the yield rise – just profit taking after the run we’ve seen recently, especially in the later part of June,” said DZ Bank strategist Rene Albrecht.

“Everyone is waiting for the EU summit… We can’t be sure there will be a solution or some kind of compromise.”

German yields also rose, with the 10-year yield up 3 bps at -0.44%, off Friday’s 6-1/2 week lows of -0.49%, as world shares approached a five-month peak.

Market focus is also on the European Central Bank (ECB), which meets on Thursday, where no change is expected to the bank’s monetary policy. Analysts will be watching the ECB’s weekly bond purchase data later on Monday for a further sense of slowdown in the bank’s bond buying.

The slowdown has been a potential cause of concern, analysts said, as some ECB bond members suggested the emergency bond purchase “envelope” might not be used in full, while others saw the slowdown as an early start to the sluggish summer period.

As widely expected, Fitch Ratings affirmed Italy’s credit rating at ‘BBB-‘ on Friday, one notch above junk. ($1 = 0.8836 euros)

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