* 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 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
"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
"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.