PARIS: The cost of borrowing for eurozone countries fell to record low levels on Wednesday, despite gloom over the economic outlook and crisis over economic policy in France.
The bond interest rates are falling following comments made by the head of the European Central Bank assuring that deflation will be kept at bay.
The interest rate or yield indicated by traded German 10-year bonds, the benchmark for the eurozone, fell to a record low level of 0.915 percent from 0.939 percent late on Tuesday.
The rate for French 10-year debt fell to a record low of 1.249 percent from 1.275 percent, against a background of the formation of a new government in France following the shock dismissal on Monday of economy minister Arnaud Montebourg, who had criticised economic policy.
Records were also broken for Italian and Spanish 10-year debt. The Italian yield fell to 2.372 percent from 2.413 percent, and the Spanish rate to 2.097 percent from 2.172 percent.
A belief that the European Central Bank is moving towards injecting money massively into the eurozone economy to ward off deflation has pushed funds into bonds before market interest rates fall further.
As the price of the bonds rises, the fixed interest they carry at issue falls as a percentage of the new, higher price. This process has been at work since remarks by ECB head Mario Draghi on Friday.
At a symposium in the United States, Draghi stressed that the ECB was vigilant about the possible threat of deflation and would ensure price stability, its supreme duty under its statutes.
This was widely interpreted as meaning that the bank is moving towards adopting quantitative easing, a policy of buying securities and thereby providing the holders of these instruments with ready cash.
The intention would be for the money to flow into the economy via loans, and so boost growth, and would also push down the euro, with the overall effect of increasing inflation.
Bond strategist Cyril Regnat at Natixis bank in Paris said that "with his words, Mario Draghi has a grip on the markets and will continue to keep this hold until the European macroeconomy turns up."
However, German Finance Minister Wolfgang Schaeuble, in a newspaper interview on Wednesday, said he felt the markets had "over-interpreted" Draghi's words.
Recent indicators show that recovery in the eurozone is flagging badly. An upturn, when it comes, will tend to draw funds out of bonds into other investments such as stocks, causing bond prices to ease and yields therefore to firm.
Investors broadly welcomed the surprise appointment of former banker Emmanuel Macron as the new French economy minister to replace Montebourg, but said that the reshuffle was having little effect on the cost of borrowing for France.
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