LONDON: German two-year bond yields reached 6 1/2-month lows as euro zone debt rallied on Tuesday, after European Central Bank policymakers strongly hinted monetary easing was imminent.
The signals that the ECB is preparing measures to spur the euro zone economy at its monthly policy meeting next week helped lower-rated euro zone debt to consolidate Monday's gains. Fears that a strong Eurosceptic vote in EU elections might destabilise fragile governments are receding.
German two-year yields, sensitive to shifts in interest rate expectations, fell to 0.05 percent, their lowest since November 2013. Ten-year Bund yields, the benchmark for euro zone borrowing, were down 3 basis points on the day at 1.33 percent. Other top-rated yields were 3 to 5 bps lower.
"We've had (ECB President Mario) Draghi prominently on the wire and Nowotny flagging that as soon as next week there will be action coming from the ECB," said David Schnautz, a strategist at Commerzbank. "This cements the downward pressure on the core bond yields."
ECB policymaker Ewald Nowotny said the bank was discussing cutting rates at its June 5 meeting as it seeks to keep the region's economic recovery from petering out.
Draghi, speaking at a forum in Portugal, said the central bank was aware of the risks from prices remaining too low for too long and had the tools to get inflation back to its target. On Monday, he said the bank must be "particularly watchful" of any negative price spiral and that more "pre-emptive action may be warranted".
The prospect of further monetary easing by the ECB is one of the main reasons peripheral euro zone bonds have rallied this year, driving their borrowing costs to historic lows.
The advance faltered last week on concern over the EU's parliamentary elections. As those fears diminish and investors refocus on the rate outlook, the rally has resumed.
Italian 10-year bond yields dipped 2 basis points to hit 2.98 percent, making further headway after their biggest one-day drop in seven months on Monday.
Prime Minister Matteo Renzi's centre-left Democratic Party held off a challenge from the anti-establishment 5-Star Movement in European parliamentary elections, strengthening his mandate to push for economic reforms.
Italy comfortably sold 3 billion euros of zero-coupon bonds on Tuesday, the top planned amount, as well as 1 billion euros of inflation-linked bonds. It is due to auction further 7.5 billion euros of long-term debt on Thursday.
Ireland and Portugal - both of which, like Greece, had to be bailed-out at the depths of the crisis - saw their 10-year yields drop 2 bps to 2.69 and 3.70 percent respectively. Spain's were 2 bps lower at 2.88 percent.
Strategists said a decisive Ukrainian presidential election, which should help reduce tensions with Russia, was also supporting risk appetite.
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