LONDON: Spanish, Italian and Portuguese yields rose on Wednesday, with financial markets showing some nervousness that an opinion due from Europe's top court on an ECB debt buying programme might hamper future purchases.
The European Court of Justice adviser's opinion, due at 0830 GMT, is on the Outright Monetary Transaction (OMT) scheme, which the European Central Bank launched at the height of the euro zone debt crisis in 2012 but never used. The programme was designed to buy the government bonds of a country in trouble on condition that its government asked for a European bailout with reform conditions attached.
The ECJ's Advocate General is due to give its opinion on whether the OMT is inconsistent with the prohibition that the ECB provides monetary financing to governments.
A negative opinion might raise concerns at least about the structure, if not about the probability, of a large-scale ECB bond buying programme to pump money into the stagnant euro zone economy and lift inflation. Traders polled by Reuters on Monday said such a programme, known as quantitative easing (QE) was a given and might come at next week's ECB meeting.
Spanish 10-year bond yields were 3 basis points higher at 1.65 percent.
Their Italian and Portuguese peers were 3-4 bps up at 1.82 percent and 2.67 percent, respectively.
They all stood close to their record lows, however, showing that the nervousness was contained. "There are some nerves that they (the ECJ) might show some sympathy with the doubts expressed by the German Constitutional Court," said RIA Capital Markets bond strategist Nick Stamenkovic.
"But I expect the decision not to prevent QE." German 10-year Bund yields fell 2 basis points to 0.457 percent, within touching distance of an all-time low of 0.433 percent. US 10-year T-note yields hit their lowest since May 2013 at 1.852 percent in Asian trading. A fall in oil and copper prices further stoked fears that the euro zone might face a prolonged period of deflation.
"The more we have evidence of deflation risk, the more the prospect of QE becomes evident for the market," BNP Paribas rate strategist Patrick Jacq said.
"I don't think that the ECJ would rule out QE completely." Societe Generale strategists agreed, saying that QE was less problematic than an OMT programme.
"QE is directed towards the ECB fulfilling its price stability mandate.
OMT in contrast, from a Germanic standpoint, can be criticised as government support," they said in a note. "Of key interest in the opinion will be anything that touches on the seniority of the ECB or otherwise. We think investors fear that the ECB would prove to be de facto senior in a serious crisis, despite claims to the contrary, and the opinion could help confirm suspicions on this front." The court's announcement is preliminary and non-binding.
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