LONDON: German two-year yields hit record lows on Wednesday after below-forecast inflation data in the region dispersed any niggling doubts that the European Central Bank may not fully deliver on expectations for aggressive monetary easing this week.
Consumer prices in the 19 countries sharing the euro increased by 0.1 percent last month, the same pace as in October, and by less than the 0.2 percent forecast by 45 economists polled by Reuters.
Before the data, yields were higher across the euro zone with analysts citing nervousness that ECB President Mario Draghi may not unleash the amount of stimulus investors were hoping for: a comprehensive package of rate cuts, additional sovereign bond buying and purchases of other assets.
"Today's inflation figures have sealed that faith," Investec chief economist Philip Shaw said.
He anticipated a six-month extension of the bond-buying programme and a 20 bps cut in the deposit rate, while expanding the pool of asset purchases and the introduction of a two-tier deposit rate were also "nuances" that could be explored.
Two-year German yields fell to a record low of minus 0.434 percent, while five-year yields dipped below the ECB's minus 0.20 percent deposit rate, within a hair of their troughs.
German 10-year Bund yields, which set the standard for euro zone borrowing costs, were flat at 0.47 percent. Other bond yields in the region fell 1-2 basis points.
Market measures of long-term consumer price growth have risen to their highest since mid-July on the prospect for inflation-boosting measures. There was only a slight dip immediately after the data.
In the United States, data showed private employers boosted hiring in November, signalling job growth is likely strong enough to support the first Federal Reserve interest rate hike in nearly a decade when policymakers meet later this month.
At 171 bps, the gap between German and U.S. 10-year yields is very close to record highs hit earlier this year.
Some strategists caution that the transatlantic yield divergence already looks too stretched.
"Even if we take into account further ECB and Fed policy divergence, spreads in the long-end of the curve are too wide and have limited exposure to further policy divergence," Mizuho strategist Peter Chatwell said.
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