By Olga Cotaga
LONDON, July 17 (Reuters) - Long-term Italian government bond yields hovered around their lowest in months on Friday, the first day of a European Union summit where member states are debating a 750 billion euro recovery fund.
Opinions on the possible outcomes of the summit range from a deal close to the original proposal to no agreement and a follow-up meeting at a later date.
ING analysts, like many in the market, expect some progress will be made this weekend, but it will stop short of a final accord. ING envisages a compromise around a 600 billion euro package split in equal parts between grants and loans, it said.
Dutch Prime Minister Mark Rutte on Friday said he saw a less than 50% chance European leaders would reach a deal on the European Recovery Fund at their Brussels summit, echoing other European leaders' comments over the week.
Given the increasing doubts a deal will be signed this weekend, an agreement this month based more on grants than loans "would be a positive for the market," said Peter Chatwell, head of Europe rates strategy at Mizuho.
He said this would open up the door to the German-Italian yield spread shrinking to pre-coronavirus levels and returning to 120 bps in three to six months.
Some wealthier northern European countries are against providing the money via grants.
The Bund-BTP spread - the premium Italy pays over safe-haven German Bund yields - was last at 171 bps, close to the lower end of the trading range this year. DE10IT10=RR
Italian 10-year yields were last up 1.4 bps at 1.25% IT10YT=RR, hovering around the 16-week low it touched on Thursday, when the ECB reassured markets it would most likely use the full firepower of emergency bond purchases to tackle the economic hit from the COVID-19 pandemic.
German 10-year yields were steady at -0.47% DE10YT=RR.
"We're expecting progress (this weekend) but, save for a few smaller countries, the benefit should fall short of a game changer. Still, the way is clear for further spread tightening," ING analysts wrote in a note to clients.
"In numbers, a swift agreement would push 10-year German-Italian yield spread towards our 150 basis point target by the end of the summer," they said.
The summit will stretch well into the weekend. ING analysts said they were not expecting much in the way of soundbites during Friday's session and advised against acting on those that emerge.
German-Italian yield spread much lower than in Marchhttps://tmsnrt.rs/2Zz9ng5
(Reporting by Olga Cotaga; Editing by Alex Richardson and Barbara Lewis)
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