The bonds of the euro (CME:E6M14) area’s higher-yielding nations surged as European Central Bank President Mario Draghi lowered interest rates and unveiled an unprecedented round of stimulus measures to boost the region’s economy.
Italian two-year yields dropped to a record after ECB officials cut the main refinancing rate to 0.15% and also moved the deposit rate below zero for the first time. The yield difference between Spanish 10-year bonds and German debt reached the narrowest since July 2010 as Draghi said the ECB will introduce targeted offerings of liquidity to banks to encourage them to lend to the real economy. Officials will also start work on purchases of asset-backed securities, he said.
“Draghi’s gone all-in today,” said Owen Callan, an analyst at Danske Bank A/S in Dublin. “Don’t think of this as a bazooka. This is more like a fleet of killer drones to target deflation from all angles. It’s a quantitative-easing style response without the risk-free asset rally, so the periphery grinds in in spread terms, but bunds sell off.”
Italy’s two-year yield fell 12 basis points, or 0.12 percentage points, to 0.63% at 2:38 p.m. London time after sliding to 0.594%, the lowest since Bloomberg began collecting the data in 1993. The 3.75% note due April 2016 rose 0.21, or 2.10 euros per 1,000-euro ($1,354) face amount, to 105.715.
The nation’s five-year yield dropped 14 basis points to 1.57%, also a record low. The 10-year rate declined nine basis points to 2.93%.
The decision to cut the benchmark interest rate by 10 basis points was forecast by 21 of 60 economists surveyed by Bloomberg. Two predicted no change with the remaining 37 calling for larger reductions. A negative deposit rate was forecast by 44 of 50 analysts in a separate survey.
Average yields on bonds across the euro region fell to a record in the past month, helping to generate returns of 5.7% this year through yesterday, according to Bloomberg World Bond Indexes.
German 10-year bunds fell for a sixth day, the longest run of declines since November 2011. The yield increased three basis points to 1.47%. The rate slid six basis points after the ECB last cut its key rate on Nov. 7. The German two-year rate was little changed at 0.06% after dropping as much as two basis points to 0.037%, the lowest since May 31, 2013.