LONDON: Euro zone bond yields fell sharply on Thursday, hauled down by a dive in British yields to record lows after the Bank of England cut interest rates and restarted its bond purchase programme to ease the economic blow from June's vote for Brexit.
German 10-year yields, the euro zone benchmark, already lower on the day after hints the European Central Bank would also soon adjust its stimulus programme, fell 6 basis points to minus 0.16 percent, according to Tradeweb data.
Most euro zone bond equivalents were down 5-8 basis points on the day.
British five- and 10-year government bond yields fell over 10 bps to hit new record lows of 0.222 percent and 0.675 percent, respectively.
Forecasting Britain's economy will stagnate for the rest of 2016, the BOE cut its main lending rate to 0.25 percent from 0.5 percent, restarted purchases of government bonds, and launched two new schemes - one to buy corporate bonds and another to ensure banks keep lending even after the cut in interest rates.
"It is not just in the euro zone or in Japan, but even here in Britain we have a situation where central banks have to keep easing to offset headwinds to their domestic and the global economy," Rabobank strategist Matt Cairns said.
The Bank of Japan introduced new monetary easing steps last week and the European Central Bank has been buying government debt since March 2015.
Before the BOE meeting, euro zone yields had already dipped after one of the ECB policymakers most resistant to monetary easing, German Bundesbank chief Jens Weidmann, said its bond-buying programme could be adjusted to prevent a scarcity of eligible debt throwing it off track.
Market expectations have risen that the ECB will soon change the rules of its asset-purchase scheme, which have put more than half of Germany's bonds out of reach and are crimping buying in smaller economies such as Portugal and Ireland.
The ECB on Thursday reaffirmed its readiness to support the euro zone as the global economic outlook becomes more uncertain after Britain's vote to leave the European Union. At the Bank's meeting last month, chief Mario Draghi said policymakers had not discussed specific changes.
But Weidmann, who has voiced doubts about the effectiveness of QE, said in an interview published on Thursday that changes could be made so long as they did not alter the underlying design of the scheme.
"It is another voice joining the choir to say that the ECB has more flexibility to adjust the programme," DZ Bank analyst Christoph Kutt said.
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