Euro-area government bonds surged after the European Central Bank unexpectedly cut all its interest rates and expanded its monthly bond purchases.
Spanish 10-year yields dropped the most in five months with the decision boosting peripheral debt relative to the higher-rated peers. ECB officials cut the central bankâ€™s deposit rate by 10 basis points to minus 0.4 percent, and its main refinancing rate to zero.
Bond purchases were raised to 80 billion euros ($88 billion) a month, starting in April, and corporate bonds will now be eligible. ECB President Mario Draghi said the package of measures are â€œcomprehensiveâ€ and the central bank will also issue four new four-year long-term loan programs to banks.
â€œThe whole thing was a major surprise,â€ said Christoph Kutt, head of rates strategy and sovereign credit at DZ Bank AG in Frankfurt. â€œThe ECB did more than markets were expecting, especially with the cutting of the refinancing rate and inclusion of corporate bonds in the program.â€
Benchmark German 10-year bund yields declined three basis points, or 0.03 percentage point, to 0.21 percent as of 2:06 p.m. London time. The 0.5 percent security due in February 2026 rose 0.305, or 3.05 euros per 1,000-euro face amount, to 102.85.
The ECB unleashed a range of stimulus measures in an effort to revive growth and inflation in the euro area. Consumer prices dropped an annual 0.2 percent in February, the latest data show. The ECB now forecasts inflation to increase 1.4 percent in 2016, compared to an earlier prediction of 1.7 percent. Draghi said the stimulus will help boost inflation back to the central bankâ€™s target of just below 2 percent and that key interest rates will remain at present or lower levels for an extended period of time.
Spainâ€™s 10-year bond yield dropped 14 basis points to 1.43 percent, the most since Oct. 22, while the nationâ€™s two-year yield fell to a record-low minus 0.062 percent. Portugalâ€™s 10-year yield declined 22 basis points to 2.94 percent, while Italyâ€™s slid 12 basis points to 1.29 percent.
The 10 basis-point reduction to the central bankâ€™s rate for holding money overnight is the same amount cut by the ECB in December. With some traders pricing in a larger cut, German two-year yields climbed six basis points to minus 0.48 percent.