Thursday, December 12, 2019
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German court tests ECB’s supra-powers

London: 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.

“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,” said a trader. “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 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.

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.