European Bonds Rise as German Court Seeks Ruling on ECB BailoutDavid Goodman and Lucy Meakin
European government bonds rose after Germany’s top court asked the European Union’s highest tribunal to rule on the legality of the regional central bank’s still-untapped debt-purchase plan.
Spanish and Italian securities led gains amid speculation the decision means Germany’s Federal Constitutional Court has conceded it is powerless to impose a veto on the Outright Monetary Transactions plan. Goldman Sachs Group Inc. and Royal Bank of Scotland Group Plc both said the European Court of Justice was unlikely to block the program. The region’s bonds extended gains after a U.S. report show employers added fewer jobs than economists forecast for a second month.
“The initial reaction was that the German court had a problem with the OMT but I think people realized they are just handing it over to the European Court of Justice, and that’s positive,” said Owen Callan, an analyst at Danske Bank A/S in Dublin. The Court “is more likely to rule in the ECB’s favor. We had a bit of a selloff but we’ve slowly reversed that,” he said, referring to Spanish and Italian bonds.
Spain’s 10-year yield dropped seven basis points, or 0.07 percentage point, to 3.59 percent at 4:35 p.m. London time after falling to 3.58 percent, the lowest level since February 2006. The 3.8 percent bond due in April 2024 gained 0.605, or 6.05 euros per 1,000-euro ($1,360) face amount, to 101.82.
Italy’s 10-year yields declined seven basis points to 3.69 percent and Germany’s fell four basis points to 1.66 percent.
Judges at Germany’s Federal Constitutional Court expressed doubts about the legality of the ECB’s bond-purchase program in a six to two vote, the court said in a statement. At the same time, acknowledging that Europe’s largest economy is bound by EU laws, the court stopped short of overstepping its own authority and asked for a ruling from the European Court of Justice in Luxembourg, made up of judges from all 28 EU countries.
The ECB announced the details of its debt-purchase plan in September 2012 after President Mario Draghi had pledged to do “whatever it takes” to save the currency. The calming of financial markets the program produced helped the single-currency bloc emerge from its longest-ever recession.
Today’s announcement “significantly reduces” the risk the OMT program will be blocked, Goldman Sachs’s chief European economist Huw Pill wrote today in a note to clients. The EU court is unlikely to strike down the OMT, RBS fixed income strategist Michael Michaelides in London wrote in an e-mail.
“This German court, which everyone’s so frightened of, turns out to be a bit of a toothless tiger,” Charles Dumas, chairman of Lombard Street Research, a London-based consulting firm, said in a Bloomberg Television interview. “They’re copping out.”
Dutch 10-year yields dropped four basis points to 1.88 percent. France’s also fell four basis points, to 2.24 percent.
Volatility on Finnish bonds was the highest in the euro-area markets today, followed by those of Italy and Spain, according to measures of 10-year debt, the yield spread between two- and 10-year securities and credit-default swaps.
European bonds declined yesterday after the ECB refrained from announcing any additional stimulus measures at its monthly policy meeting. The central bank left its main refinancing rate at a record-low 0.25 percent, as predicted by all except four of 66 economists surveyed by Bloomberg News.
U.S. employers added 113,000 workers last month, following a revised 75,000 increase in December, the Labor Department said in Washington. The median forecast of economists in a Bloomberg survey was for an additional 180,000 jobs.
Spanish bonds returned 3.2 percent this year through yesterday, Bloomberg World Bond Indexes show. Italy’s gained 2.4 percent and Germany’s rose 1.8 percent.