Bond yields in five euro zone countries hit new lows on Wednesday after an opinion from an adviser to Europe’s top court on an unused ECB debt buying programme eased concerns about legal obstacles to future central bank purchases.
Pedro Cruz Villalon, advocate general at the European Court of Justice, said the European Central Bank was entitled to buy bonds, on condition that it was not directly involved in an assistance programme for beneficiary countries.
He said the Outright Monetary Transaction programme (OMT), which the ECB launched at the height of the euro zone debt crisis in 2012 but never activated, was necessary and proportionate because the ECB did not take on a risk that would make it vulnerable to insolvency.
The opinion, which was preliminary and non-binding, eased concerns that the ECB would not be able to embark on large scale bond-buying programme, known as quantitative easing (QE), to pump money into the bloc’s stagnant economy and boost inflation.
It also advised against giving the ECB preferential treatment by placing it the first in line for debt repayment, which was one concern in the market.
"The most important thing is that the OMT and bond buying is in line with the EU's treaty," said Cyril Regnat, fixed income strategist at Natixis.
French, Belgian, Austrian, Dutch and Finnish 10-year yields hit record lows around 0.50-0.70 per cent. Their Spanish and Italian counterparts reversed an earlier rise caused by nervousness before the opinion was given.
Traders polled by Reuters on Monday said QE was a given and might be announced at next week’s ECB meeting.
In an advance release of an interview with German newspaper Die Zeit, ECB president Mario Draghi said a loose monetary policy was needed to achieve price stability and the governing council was determined to deliver it.
Sharp falls in oil and copper prices further stoked fears that the euro zone might face a prolonged period of deflation.
The euro five-year, five-year breakeven forward , one of the most closely watched measure of the market’s longer-term inflation expectations, traded just above 1.50 per cent, well below the ECB’s inflation target of close to 2 per cent. The measure shows what the market expects 2025 inflation forecasts to be in 2020.
"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.
German 10-year Bund yields fell 2 basis points to 0.457 per cent, within touching distance of their all-time low of 0.433 per cent. US 10-year T-note yields hit their lowest since May 2013 at 1.852 per cent in Asian trading.
Reuters
