AMSTERDAM- Euro zone bond yields held below recent highs on Wednesday, a day ahead of a European Central Bank meeting, while there was little reaction to Germany's constitutional court dismissing challenges to its approval of the EU recovery fund.
Rising coronavirus cases and a fall in the oil price cast doubt on the strength of global economic growth and dampened risk appetite across global markets on Wednesday.
Investor focus also turned to Thursday's ECB meeting. The bank is largely expected to keep policy on hold, while investors are looking for clarity on how it will react to an economic recovery in Europe, especially in terms of its emergency bond-buying programme, which holds down government borrowing costs.
Market reaction was muted to news that Germany's constitutional court paved the way for the country to sign off legislation ratifying the European Union's Recovery Fund as it dismissed legal challenges against the plan.
The challenges were a potential threat to government bonds from highly-indebted Southern European countries like Italy, which stand to benefit most from the fund.
The German 10-year yield DE10YT=RR , the benchmark for the euro area, was up less than 1 basis point to -0.25% at 0953 GMT, below the highest level since late February, at -0.215%, touched on Tuesday.
Italy's 10-year yield was down less than 2 basis points, with the risk premium on top of German bonds holding at 101 basis points.
"It was largely in the price. I don't think too many investors from our sense saw it as a challenge that was going to have too much impact. I think it's in line with what was expected," Peter McCallum, rates strategist at Mizuho in London, said of the lack of market reaction to the court decision.
Focus remained on German elections, after an opinion poll late on Tuesday showed the Green Party overtook the conservatives after the latter named Armin Laschet as its candidate to succeed Chancellor Angela Merkel in September elections.
German bond yields had risen sharply on Monday when the Green Party announced its candidate for chancellor, turning market focus to prospects for greater fiscal spending.
"Political uncertainty in Germany is unlikely to diminish soon, which might hold back Bund yields from rising further unless the ECB offers new insights," said UniCredit analysts, adding they didn't expect the ECB to do so on Thursday.
Later on Wednesday, focus turns to the U.S. Treasury, which will sell $24 billion of 20-year bonds in an auction.
(Reporting by Yoruk Bahceli; Editing by Ana Nicolaci da Costa and Pravin Char) ((Yoruk.Bahceli@thomsonreuters.com; +44 20 7542 7571; Reuters Messaging: yoruk.bahceli@thomsonreuters.com))
