Short-term bond yields surge as ECB signals rate freeze

LONDON: German two-year bond yields posted their biggest daily rise in three months on Thursday after ECB President Mario Draghi said he did not anticipate reducing interest rates further.

The comments dampened enthusiasm for a wide package of stimulus measures unveiled at the central bank's policy meeting, including cuts to the ECB's main rates, an expansion of its bond-buying programme and a new loan scheme for banks.

Yields on the two-year Schatz initially touched a day's low of -0.56 percent before about-turning to hit a 1-1/2-month high of -0.44 percent. Up 8 basis points on the day, they were on track for their biggest daily rise since the ECB's meeting in December which also underwhelmed markets.

Money market rates rose as investors significantly reduced their expectations of further rate cuts this year, while longer-term bond yields across the single currency bloc also reversed earlier falls.

Elsewhere, the euro jumped to a three-week high and European shares reversed earlier gains..

"The rise in Schatz yields was very aggressive ... after he ruled out the need for further deposit rate cuts during the press conference," David Keeble, global head of fixed income strategy at Credit Agricole in New York.

"The key fear is that we got some measures but this is it for the moment."

Only lower-rated bonds in the bloc's southern periphery, which stand to gain more from the ECB's supercharged bond-buying and loan schemes, held broadly steady on the day.

Spanish and Italian 10-year yields were flat to a touch higher at 1.57 and 1.44 percent, having been at 10-month lows of 1.37 and 1.24 percent, respectively.

Portuguese equivalents were 4 bps lower on the day at 2.99 percent, having earlier been down as much as 30 bps at a six-week low of 2.70 percent.

The ECB increased monthly asset buys under its quantitative easing scheme to 80 billion euros from 60 billion euros, above market expectations of an increase to 70 billion, and said it would start buying corporate debt.

It also launched four new rounds of cheap loan packages, to be extended by banks to the real economy.

The new measures came as the ECB revised down its inflation forecasts as broadly expected, while market measures of long-term consumer price growth barely budged.

German 10-year yields rose 6 bps to 0.30 percent , with the gap to two-year yields closing as the curve flattened. Flatter curves suggest the market sees falling growth and inflation over the longer term.