European government bonds rallied after European Central Bank President Mario Draghi signaled officials will consider charging lenders to park excess cash with the central bank overnight in a bid to boost the economy.
Germany’s two-year note yields fell below zero while those on 10-year bunds dropped to the lowest level since July after the ECB cut its benchmark interest rate to a record 0.5 percent and Draghi said another decrease is possible. The rates on French, Finnish and Belgian 10-year debt slid to all-time lows and Spanish bonds climbed after the ECB President said monetary policy will remain accommodative for as long as needed. Euribor futures rose as investors raised bets on lower borrowing costs.
“Draghi hinted that the ECB is ready to act more aggressively if needed,” said Alessandro Giansanti, a senior rates strategist at ING Groep NV in Amsterdam. “The ample liquidity in the market will be supportive for lower core yields” referring to the euro area’s higher-rated securities.
German two-year yields fell five basis points, or 0.05 percentage point, to minus 0.031 percent at 4:35 p.m. London time, after reaching minus 0.036 percent, the lowest since April 2. The 0.25 percent security maturing in March 2015 rose 0.085, or 85 euro cents per 1,000-euro ($1,305) face amount, to 100.52.
The yield on similar-maturity Finnish notes dropped as much as seven basis points to minus 0.02 percent, the least since Dec. 12. A negative yield means investors who hold the security until it matures will receive less than they paid to buy it.
“We will look at all the incoming data and stand ready to act if needed,” Draghi told reporters at a press conference in the Slovakian capital, Bratislava, after the ECB lowered its key rate by 25 basis points. Asked if further action may include the unprecedented step of taking the deposit rate negative from zero, he said: “We will look at this with an open mind.”
German 10-year yields slid four basis points to 1.17 percent, after reaching 1.15 percent, the lowest level since July 23. French (GFRN10) 10-year yields dropped to 1.659 percent, the least since Bloomberg began compiling the data in 1990. The rate on similar-maturity Belgian bonds slipped to 1.913 percent.
The implied yield on the Euribor futures contract expiring in June 2014 fell four basis points to 0.22 percent.
Draghi also said the ECB will continue to lend banks as much money as they require at least until mid-2014. The Frankfurt-based central bank has also started to consult with European institutions to improve the flow of credit to companies using collateralized loans, he said.
“The main point to take home here is the dovish message on the economy, on liquidity and the willingness to support risky assets going forward,” said Gianluca Ziglio, executive director of fixed-income research at Sunrise Brokers LLP in London. “Discussing the possibility of a cut in the deposit rate has broken a taboo.”
Spanish 10-year yields dropped as much as nine basis points to 4.05 percent, while the rate on similar-maturity Italian (GBTPGR10) securities fell up to 13 basis points to 3.78 percent, both the lowest since October 2010.
Volatility on Greek bonds was the highest in euro-area markets today followed by those of Finland and Spain, according to measures of 10-year debt, the yield spread between two- and 10-year securities, and credit-default swaps.
German government bonds returned 1.1 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. French bonds gained 1.7 percent, while Spanish securities earned 8.2 percent, the indexes show.
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