UPDATE 2-Euro area yields steady ahead of ECB, after German court

Yoruk Bahceli
·2 min read

* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr (Updates prices, adds analyst comments)

By Yoruk Bahceli

AMSTERDAM, April 21 (Reuters) - Euro zone bond yields held below recent highs on Wednesday, a day ahead of a European Central Bank meeting and after Germany's constitutional court dismissed challenges to its approval of the EU recovery fund. Rising coronavirus cases and a fall in the oil price cast doubt on the strength of global economic growth and dampened risk appetite across global markets on Wednesday.

Investor focus also turned to Thursday's ECB meeting. The bank is largely expected to keep policy on hold, while investors are looking for clarity on how it will react to economic recovery in Europe, especially in its emergency bond-buying programme.

Germany's constitutional court declined on Wednesday to block the European Union's COVID-19 recovery fund.

The challenges were a potential threat to government bonds from highly-indebted Southern European countries like Italy, which stand to benefit most from the fund.

Italy's 10-year yield was down 2.5 basis points, with the risk premium on top of German bonds tightening by 2.4 basis points to 101 basis points.

The court did not indicate when it would rule on the full complaint against the fund.

"Today's release suggests that while the risk that the court will rule against the recovery fund is non-zero, it is not very high," Citi analysts said in a research note, adding that "it could take 2-3 years to a final decision."

"It was largely in the price. I don't think too many investors from our sense saw it as a challenge that would have too much impact. I think it's in line with what was expected," Peter McCallum, rates strategist at Mizuho in London, said, referring to the court decision.

Some analysts saw a green light from the German court as a double-edged sword as good news about the EU recovery fund coupled with economies reopening could lead to what they call some "hawkish mistake" from the ECB in June, according to BofA.

The German 10-year yield, the benchmark for the euro area, was flat at -0.26%, below the highest level since late February -0.215%, touched on Tuesday.

Focus remained on German elections after an opinion poll late on Tuesday showed the Green Party overtook the conservatives after the latter named Armin Laschet as its candidate to succeed Chancellor Angela Merkel in September elections.

German yields had risen sharply on Monday when the Green Party announced its candidate for chancellor, turning market focus to prospects for greater fiscal spending. (Reporting by Yoruk Bahceli, additional reporting by Stefano Rebaudo; Editing by Nick Zieminski)