Euro zone bonds react little to recovery fund veto; Italy to sell dollar bond

AMSTERDAM: Euro zone bond yields showed little reaction to Hungary and Poland's veto of the European Union's budget and recovery fund on Tuesday, while Italy was due to sell a US dollar bond.

Hungary and Poland blocked the adoption of the EU's 2021-2027 budget and recovery fund on Monday over a clause that ties funds to respecting the rule of law.

Although the fund is among the factors that have supported investor appetite for government bonds from Southern European countries, the fund's main beneficiaries, they were undeterred by the news.

Italy's 10-year benchmark yield was last down 1 basis point on the day at 0.61%. Other Southern European bond yields were also lower, with Greek 10-year yields touching a new record low at 0.68%.

The closely-watched gap between Italian and German 10-year yields - effectively the risk premium on Italian debt - was near its lowest since early 2018 at around 115 basis points.

The lack of market reactions "tend to reflect the market's view that the EU will find a way to hammer out a compromise that keeps all parties roughly happy," said Andy Cossor, a strategist at DZ Bank.

European affairs ministers will on Tuesday debate the blocking move that threatens to delay the recovery fund's disbursement.

The German EU presidency and the French government expressed confidence a solution would be found.

Safe-haven German 10-year bond yields were unchanged on the day at -0.55% after a modest sell-off on Monday.

Some analysts said worries around the recovery fund may have limited Monday's bond sell-off in the reaction to news from US drugmaker Moderna, which, following on from Pfizer's announcement last week, also reported its experimental vaccine was more effective than expected in preventing COVID-19.

Attention was also on issuance as Italy received $7.5 billion demand for a five-year US dollar bond it will price later on Tuesday.

Commerzbank analysts expect Italy to raise $2.5 billion from this issue.

Italy last issued US dollar bonds in October 2019, when it raised $7 billion from five, 10 and 30-year bonds in the first such issuance since 2010.

Germany also visited the primary market, raising 4.125 billion euros via the auction of a new two-year bond.

In the money markets, ESTR, an overnight borrowing rate compiled by the ECB, continued to dip, Tuesday's reading of -0.558% based on Monday activity showed, reversing a sharp rise in Friday's reading that pushed it to its highest since July.