Bond yields move lower as ECB confirms purchases

Europe's debt markets smashed through another set of records on Wednesday as the European Central Bank reaffirmed its commitment to buying €60bn of bonds a month until the region's inflation improves.

Rejecting the idea that the eurozone might consider curbing its programme of quantitative easing early, ECB president Mario Draghi used a regular press conference to clarify that purchases would run until the central bank saw a sustained adjustment in eurozone inflation.

Bond markets immediately rallied, sending a number of bond yields to fresh lows.

Germany's benchmark 10-year government borrowing costs fell to 0.10 per cent, a new record. Shorter-term German debt is trading in negative territory all the way up to eight years, raising speculation that longer dated debt could also drop below zero.

The debt rally extended across European sovereign bonds, sending benchmark borrowing costs in France, Ireland, Austria, Finland and the Netherlands to similarly hit record lows.

Europe's €60bn a month bond buying plan to boost the region's economy has pushed up prices for sovereign debt in the region, sending yields to ultra-low levels.

Across Europe, more than €1.6tn of government bonds now trade below zero according to JPMorgan, and last week Switzerland became the first country to sell 10-year debt at a negative yield.

Equities have also gained as a result of the €1.1tn quantitative easing programme and on Wednesday afternoon the FTSE Eurofirst 300 rose 0.6 per cent to a 15-year high.

The eurozone's economic outlook has enjoyed better than expected data recently, including strong industrial production numbers and positive business surveys, indicating a return in confidence.

The ECB's April press conference was a balancing act, said Ben May at Oxford Economics. Although the central bank can take comfort from a recent run of upbeat economic data and rising inflation expectations it also made repeated attempts to scotch the idea that this could trigger an early end to QE, although an extension beyond September 2016 now looks less likely.

"President Draghi told us little new, except for raising very high hurdles for tapering and further deposit rate cuts," said Michael Michaelides at RBS.

"Not much was expected from today's ECB press conference, and notwithstanding an interruption at the very beginning, there weren't any surprises," said Marchel Alexandrovich, economist at Jefferies. "Of course the wild card here remains Greece, and if the situation there deteriorates, the ECB will be forced to rip-up whatever forecasts it currently considers likely."

Credit rating agency S&P downgraded Greece on Wednesday afternoon, saying that without deep economic reform or further relief, it expected Greece's debt and other financial commitments to be unsustainable. Yields on Greek debt, which is thinly traded on secondary debt markets, rose with the country's 2017 two-year bond yield rising to 24.2 per cent.

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