Spain yields near 8-yr low as ECB bond plan referred to EU court
* Germany refers ECB's OMT to European Court of Justice
* European court seen more likely to support ECB plan
* Peripheral bond yields fall
* German yields also fall on lingering OMT disquiet
By Emelia Sithole-Matarise
LONDON, Feb 7 (Reuters) - Spanish yields fell close to eight-year lows on Friday as investors bet a German court decision to refer a complaint against the ECB's bond-buying plan to Europe's top court had reduced the risk it could be curbed.
The European Central Bank scheme has not been used since it was unveiled in 2012 but has been credited with stemming attacks on Spanish and Italian bonds at the height of a debt crisis that threatened the survival of the euro.
The ECB reiterated on Friday that its Outright Monetary Transactions (OMT) plan was within its mandate.
Any potential curb on the OMT would alarm investors. An initial rally in German Bunds, the euro zone safe-haven in times of market volatility, and underperformance of shorter-dated lower-rated euro zone bonds reflected some disquiet.
Germany's Constitutional Court said in a statement there was good reason to think the scheme exceeded the ECB's mandate and violated a ban on it funding governments.
However, it said it "also considers it possible that if the OMT decision were interpreted restrictively" it could conform with the law.
Spanish 10-year yields were down 6 basis points at 3.59 percent, within sight of their lowest levels since early March 2006. Italian equivalents fell 4 bps to 3.72 percent.
"There's a chance that the European Court of Justice has a much more broader interpretation of the OMT than the German court, which means they could be more aligned with the ECB's own view that the OMT is within the mandate of the ECB," said Alessandro Tentori, global head of rates strategy at Citi.
"That's why we are seeing the market come back after the initial fast reaction to the news."
The German court decision also comes at a time of debate within the ECB over its options for doing more to support a fragile euro zone economic recovery, including cash injections to which Germany has long objected.
Strategists at Rabobank said the market should ultimately view the German court move as favourable for peripheral bonds as it removed the risk of national concerns obstructing "a supranational mechanism".
"Of course, a positive decision from the European Court is not assured but it is certainly less constrained by nation-level concerns as regards a pooling of fiscal resources and, hence, sovereignty. We would argue that this should be positive peripheral risk," they said in a note.
An improved economic outlook for the currency bloc, especially in austerity-hit Spain, and expectations the ECB will ease monetary policy in the coming months also encouraged yield-hungry investors to keep faith in the bloc's peripheral debt, analysts said.
German Bund futures were last 30 ticks up on the day at 143.63, retreating from earlier highs of 144.02, while cash 10-year yields fell 2 bps to 1.68 percent.
Others in the market said the rally in Bunds could also be driven by some investors buying back into the market after a sharp sell-off on Thursday after the ECB held interest rates steady and gave no strong signal on imminent policy measures.