LONDON Feb 7 German Bund futures rallied while
lower-rated bonds pared gains on Friday after Germany's top
court referred a complaint against the European Central Bank's
"unlimited" bond-buying scheme to the European Court.
The ECB, whose Outright Monetary Transaction plan, unveiled
in 2012 and widely credited with easing the sovereign debt
crisis even though it has yet to be activated, immediately
reiterated that the programme fell within its mandate.
Any potential curb on the OMT would alarm investors.
Germany's Constitutional Court said in a statement it saw
"important reasons to assume that the scheme exceeded the ECB's
monetary policy mandate and thus infringes the powers of the
member states, and that it violates the prohibition of monetary
financing of the budget".
However, it said it "also considers it possible that if the
OMT decision were interpreted restrictively" it could conform
with the law.
German Bund futures, sought as a safe-haven in
times of market volatility, rose to a high for the day of
144.02, up 69 ticks on the day, before retreating to 143.72.
Cash 10-year Bund yields were down 3 bps at 1.67
percent, outperforming other euro zone bonds.
Spanish and Italian yields edged up from earlier troughs but
Spanish 10-year yields remained within sight of
fresh eight-year lows of 3.607 percent.
"This seems to be a knee-jerk reaction to these headlines
about the OMT and seems overdone," one trader said.
"One would have thought the European Court of Justice is
going to be a little bit broader in its interpretation and
probably be more euro friendly. The fact they have referred it
is probably not so negative for the OMT eventually."
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
"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.
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.
The rebound in euro zone bonds on Friday was, however,
tempered by investor anticipation that U.S. non-farm payrolls
data due later in the day will show more robust jobs growth than
December's surprisingly weak gains.