4 Min Read
* Germany refers ECB's OMT to European Court of Justice
* European court seen more likely to support ECB plan
* Peripheral bond yields fall
* U.S. payrolls report below expectations, Bund yields fall
By Emelia Sithole-Matarise and Marius Zaharia
LONDON, Feb 7 (Reuters) - Spanish yields fell close to eight-year lows on Friday as a German court decision to refer a complaint against the ECB's bond-buying plan to Europe's top court was seen as potentially reducing the risk it could be altered.
The European Central Bank scheme has not been used since it was unveiled in 2012 but has been credited with stemming a sharp selloff in 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.
The initial market reaction reversed later in the session.
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 7 basis points at 3.58 percent, within sight of their lowest levels since early March 2006. Their initial reaction to the German court decision was a 3 bps rise to 3.65 percent.
Italian equivalents fell 7 bps on the day to 3.69 percent .
"There's a chance that the European Court of Justice has a much 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."
Analysts said the improving euro zone growth outlook and expectations the ECB will keep its monetary policy ultra-loose for a long period of time could actually protect the periphery from a major sell-off if the court ruled against the OMT.
That scenario "would see a flight into Bunds, as it would be viewed as reducing the contingent liability... that falls on Germany... and would reduce the size of the safety net available to the periphery," said Padhraic Garvey, head of investment grade debt strategy at ING.
"The size of that flight would be muted by the fact that the ... peripheral environment is in a better place now than a couple of years ago when all of these structures were first dreamt up."
The positive sentiment towards the periphery could not be dampened by a weaker-than-expected U.S. jobs report.
Non-farm payrolls rose only 113,000 versus expectations of 185,000 in a Reuters poll.
"There are still questions whether the relative weakness in the payrolls was weather-related or not. We need more time to look at the data to see if there's something fundamental there," said Investec chief economist Philip Shaw.
German 10-year Bund yields fell 4 bps to 1.66 percent, with their drop accelerating after the U.S. jobs report. Bund futures closed 50 ticks higher at 143.83