May 5, 2020: Euro zone bond yields inched up on Tuesday before a German court ruling on the legality of a European Central Bank debt purchase programme that has for years capped sovereign borrowing costs and is widely credited with keeping the eurozone intact.
An easing in Sino-U.S. tensions over the coronavirus pandemic weighed on safe-haven, too, alongside signs that economies shuttered for weeks are preparing to gradually resume economic activity.
But focus in Europe is on Germany's Constitutional Court's ruling on a case brought by a group of academics who argue the European Central Bank's bond purchases constitute direct financing of governments — a contravention of the European Treaty.
German 10-year yields rose 1.5 basis points at 0.55%, having touched a seven-week low around 0.593% early on Monday. Borrowing costs elsewhere in the eurozone also increased, with Italian 10-year yields up 2 bps at 1.77%.
The ECB's PSPP scheme has seen it amass 3 trillion euros of bonds since 2015, with plans to print another trillion euros this year. A court rejection of the German Bundesbank's participation in PSPP would be devastating for the ECB.
While such an outcome is considered unlikely, “the court could remind the euro area (and markets) that the question of the Bundesbank's participation in future risk-mutualisation shouldn't be taken for granted,” Deutsche Bank analyst Jim Reid told clients.
There are also fears a court ruling on the original stimulus programme could open the way for challenges to the ECB's pandemic-fighting programme, where criteria are looser.
The court ruling comes at a time when the euro area economy has been devastated by the pandemic lockdowns. PMI data on Monday confirmed a collapse in manufacturing, showing the sharpest contraction in activity on record. A composite PMI due Wednesday may reflect an even worse picture in services.