Peripheral euro zone bonds rally after ECB throws kitchen sink

LONDON: Peripheral euro zone government bond yields dropped close to record lows on Thursday, as the European Central Bank launched a raft of measures to fight low inflation and prop up the bloc's fragile recovery.

Spanish and Italian bonds outpaced their higher-rated peers after the ECB crossed into uncharted policy waters to try to promote bank lending in some of the continent's most vulnerable economies.

"The big picture of all the ECB measures, as technical as they are, is definitely that it remains focused on the periphery," said David Schnautz, an interest rates strategist at Commerzbank.

The ECB cut all its main rates to record lows, taking the unprecedented measure of imposing negative interest rates on overnight bank deposits.

Among other measures, ECB President Mario Draghi also outlined a new long-term loan programme for banks to promote lending to small and mid-sized businesses.

"Markets had a shopping list and by and large that was delivered," said JPM Strategic Bond Fund Manager Nick Gartside.

Spanish and Italian bond yields dropped 9 bps and 7 bps, respectively, to hit day lows of 2.81 and 2.92 percent, before paring some of those gains. Greek equivalents dropped 16 bps to a day's low of 6.23 percent, while Portugal's dropped 9 bps to 3.61 percent.

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Bond strategists said the measures could be negative for German 10-year bonds and futures contracts, the benchmark in the euro zone.

While the ECB did not rule out a broader asset-purchase programme that could incorporate all euro zone government bonds, RBS said any such measure looked to be some time off, especially with the ECB's new loan programme only becoming available from September.

Schnautz at Commerzbank said the ECB's focus on driving up inflation would also have to be factored into valuations for long-end rates products.

German Bund futures dropped 68 ticks to a day's low of 145.25 at Draghi's press conference, before moving back into positive territory later in the session. German 10-year cash bond yields jumped 4 bps to a day's high of 1.44 percent, although later retreated.