Yields on ten year bonds from the riskier European nations fell on Monday morning as the currency union’s central bank heads toward a decision on monetary policy. On Wednesday the European Court of Justice will make a ruling on whether or not it thinks such a bond-buying program would overstep the remit of the ECB.
On Monday morning yields on Greek 10-year bonds fell by 72 basis points to hit 9.42 percent at 8 a.m EST. Yields on Spanish and Italian bonds also saw drops, though the numbers weren’t quite as dramatic.
Yields on 10-year bonds from those countries fell by 2-3 basis points on this morning’s debt market. The major mover of European debt markets in recent weeks and months has been speculation about the shape and scale of a recovery program that might be launched by the European Central Bank.
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Investors are betting the ECB will institute a program of quantitative easing in order to foster recovery in Europe’s struggling economy. The program would involve the purchase of state debt by central banks, according to expectations. This would, all else remaining equal, compress yields on bonds across the continent.
A court decision to be released on Wednesday will revolve around an older attempt to institute a bond-buying program, called Outright Monetary Transactions. OMT was referred to the European Court of Justice by Germany’s Constitutional Court last year. The court’s opinion will not be binding, but it will likely have a major effect on decisions made by the Central bank in the coming week’s and months.
There are several forms that such an intervention could take, though some of the options may not be enough to resurrect Europe’s struggling economy or sustain the current low in yields. Lows in yields were disrupted last week by rumors that the larger nations would seek to spread the risk of bond buying to the periphery by forcing regional central banks to purchase bonds.
Deflation and low growth are the major shadows being cast on the continent’s economy right now, and bond-buying is seen as a way of solving both. ECB intervention along those lines should increase inflation by increasing the money supply and lowering interest rates.
The central bank will hold a meeting to discuss the economic situation in the Eurozone on January 22. Analysts and investors will be looking for Mario Draghi, the bank’s current president, to give some hint of a program of bond buying after that meeting. Some even expect him to announce such an intervention at the meeting itself.
The cause of the dramatic drop in yields on Greek bonds this morning may be more multi-faceted. The country is headed for a general election that may see an anti-European party take control of government. That may result in an exit from the common European currency, a situation that could send the country toward a default.
Syriza, a left wing party that is seen as a likely leader in the next government, appears to have softened its stance on the European Union and the country’s debt obligations. Statements by the party’s leader to that effect, coupled with polls showing that Syriza may not be able to secure a majority, appear to have made investors less nervous about the future of the European currency union.