(Updates yields, adds comment)
By Elizabeth Howcroft
LONDON, April 24 (Reuters) – Italian government bond yields rose briefly on Friday after EU leaders agreed to build a emergency fund to help states recover from the pandemic, but gave no details of the size, speed and structure of the package.
The leaders agreed late Thursday in principle to a 1.5 trillion-euro rescue package to share the economic cost of the pandemic, which is falling disproportionately on southern European states. A decision on the details of the programme was delayed until the summer.
Italy’s 10-year bond yield rose as much as 10 bps in early London trading, before reversing course as demand returned. It was last down around 3 bps at 1.97%. The Italian/German 10-year bond yield gap was as much as 16 bps wider than late Thursday, before narrowing to 242.95 bps, still up 6 bps on the day.
French President Emmanuel Macron said EU governments still disagreed over whether the emergency fund should be transferring grant money or simply making loans.
Spanish, Portuguese and Greek bond yields also rose in early trading, but to a lesser extent than Italy’s, before falling again. Spain’s 10-year government bond yield was last down 4 basis points at 1.01%.
The benchmark German 10-year government bond yield fell around 3 bps as investors sought safety. It was last at -0.46 .
Italy’s bond market faces another test on Friday, with S&P Global set to review the country’s BBB credit rating – just two notches away from junk territory.
A downgrade is considered unlikely, despite Italy’s deteriorating debt outlook. Moody’s said on Thursday that the pandemic will push Italy’s public debt to record levels this year.
Rabobank rates strategist Lyn Graham-Taylor said there was a strong economic case for S&P to lower Italy’s rating but rating agencies faced political pressure not to downgrade low-rated eurozone sovereigns.
“Our base case is that no change will be made but it’s not based on an economic view or debt view at all – it’s purely based on a reluctance by rating agencies to make politically unpopular moves,” he said.
Fitch late on Thursday revised its outlook on Greece to stable from positive – the latest sign that the ratings outlook for euro zone sovereigns has worsened.
Elsewhere, the 3-month euribor rate eased a touch but remained near four-year highs. (Reporting by Elizabeth Howcroft; additional reporting by Dhara Ranasinghe; editing by Larry King and Andrew Heavens)
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