June 22, 2020 / 10:14 AM / 15 days ago

UPDATE 2-Euro zone bond yields fall on hopes of de-escalation between German court and ECB

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices)

By Dhara Ranasinghe and Joice Alves

LONDON, June 22 (Reuters) - Italy led a fall in euro zone borrowing costs on Monday on hopes that changes to the composition of Germany’s top court could lead to less confrontation with the European Central Bank.

In a ruling last month, the Constitutional Court gave the ECB three months to justify bond purchases under its flagship stimulus programme or lose the Bundesbank as a participant, raising questions about the future of the euro.

But according to two sources, the appointment of a new court president and judge on Monday could signal a de-escalation with the ECB. A key change will be a new judge joining a bench widely seen to have a narrow Eurosceptic majority.

German Finance Minister Olaf Scholz said on Monday there would soon be a resolution without drama to the constitutional court’s ruling.

Analysts said the developments were positive for euro zone bond markets, long underpinned by massive ECB asset purchases.

“I think this is going to help sentiment to an extent and this is going to help the credibility of QE (quantitative easing) and the ECB,” said Antoine Bouvet, senior rates strategist at ING in London.

“So the market reaction here should be that (bond) spreads do better and this is why I agree with Italian spreads tightening to Germany for example this morning”.

Italy’s 10-year bond yield fell 6 basis points to 1.36% , heading back to lows hit last week that marked the lowest levels since late March.

The closely-watched Italian-German 10-year bond yield gap was at around 178 bps.

Most other euro zone bond yields were down 3-6 bps on the day, with news of rising coronavirus cases supporting demand for fixed income.

Germany’s benchmark 10-year Bund yield fell 3 bps to a one-week low of -0.44%.

The World Health Organization reported a record increase in global coronavirus cases on Sunday, with the total rising by 183,020 in a 24-hour period. The biggest increase was from North and South America.

The news kept alive concerns that a second wave of the virus could further hurt the world economy, bolstering demand for safe-haven debt such as German bonds.

“Going forward, a crucial question for markets, will be the extent to which the outbreak remains concentrated in a handful of (U.S.) states, or whether a fully-fledged second wave begins to take hold in the country as a whole,” analysts at RBC Capital Markets said in a note. (Reporting by Dhara Ranasinghe and Joice Alves; Editing by Larry King, Kirsten Donovan and Alex Richardson)

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