LONDON: German government bond yields hit record lows deep in negative territory and French 10-year yields turned negative for the first time on Tuesday after the European Central Bank chief said there would be more stimulus if inflation failed to pick up.
The ECB will need to ease policy again, possibly through new rate cuts or asset purchases, if inflation does not head back to its target, Mario Draghi told the ECB's annual conference in Sintra, Portugal.
His remarks accelerated the dash for bonds, already in play as investors fret about the world economy, trade wars and simmering Iranian-U.S. tensions.
"We're not that far from a 'whatever it takes' moment in the sense that the key message was they will do whatever it takes to avoid a worsening of macro conditions by year-end," said Didier Borowski, head of global macroeconomic research at Amundi.
Germany's 10-year bond yield, the benchmark for the bloc, fell eight basis points to a record low of minus 0.329pc.
Even news that U.S. President Donald Trump had spoken to Chinese President Xi Jinping and that the United States and China would restart trade talks failed to put a significant dent in yet another stellar bond market rally.
Across the bloc, 10-year bond yields hit new lows.
The Dutch 10-year bond yield hit a record low at minus 0.168pc, while French and Austrian 10-year bond yields entered negative territory for the first time. The Draghi effect also sent U.S. 10-year Treasury yields to their lowest since September 2017.
"He has been quite bold - not that all these measures were not already hinted at, but today is probably the first time we hear directly from Draghi that all these tools are considered available," said UniCredit rates strategist Luca Cazzulani.
"We are facing a difficult situation globally and inflation expectations in the euro zone are extremely low. Also, the markets are pricing in bold action from the Fed; in this environment it is difficult for the ECB to stand still."
A closely watched survey by the ZEW Institute showed the mood among German investors deteriorated sharply in June.
Money market investors now fully price in an ECB rate cut for December 2019. Just two weeks ago, investors priced a 60pc chance of a 10 bps rate cut by the end of the year.
The euro weakened across the board, falling to a two-week low versus the dollar and to a 1-1/2 week low versus the Swiss franc.
Trump, who has persistently called on the Fed to ease monetary policy, accused Draghi of trying to weaken the euro to gain an unfair advantage in trade.
The main euro zone stocks index reversed early losses as the euro fell. It was last up 1.8pc.
Inflation expectations, on the other hand, were boosted by talk of more stimulus, with a key market gauge the five-year, five-year break-even rate rising sharply to just above 1.23pc from 1.144pc on Monday.
Speaking later in the day, Draghi said some market-based measures of inflation expectations have lost significance "due to technical conditions".
In Italy, bond yields dropped 12-20 bps across the curve. The euro zone's third-largest economy is seen as one of the biggest beneficiaries of ECB largesse.
"From our perspective the ECB doesn't need to rush into action," said Marchel Alexandrovich, European Financial Economist at Jefferies. "There is still room to sit back and watch the data."
Italy's 10-year bond yield fell 20 bps lower to 2.09pc, set for its biggest one-day drop in about a year. Its yield spread over Germany was at its tightest level since March at around 237 bps.
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