Yields on a clutch of euro zone countries' bonds hit record lows on Friday after European Central Bank President Mario Draghi gave his strongest signal yet that government debt purchases may not be far away. Ten-year bond yields in Ireland, Italy, Austria, France and Spain hit all-time lows and most of their regional peers were near their troughs after Draghi said "excessively low" inflation had to be raised quickly by whatever means necessary.
He said the ECB would recalibrate the size, pace and composition of its asset purchases if its recent move to buy securitised private debt is not enough to lift inflation back to the near 2 percent target from 0.4 percent currently. Italian 10-year yields fell as low as 2.195 percent, about 9 basis points lower on the day, while Spanish equivalents were down 8 bps at 2.014 percent.
"He has sharpened up his tone when it comes to further measures," said Lauri Haelikkae, fixed income strategist at SEB. "They are now starting to prepare the market." German Bund yields, the region's benchmark, were not far off their record low at 0.77 percent. Many strategists say a squeeze on the ECB's balance sheet, coupled with what are likely to be internal forecasts of weakening growth and inflation, will push it to launch a quantitative easing scheme by early March.
Such a scheme involving government bond purchases is strongly opposed in Germany but Bundesbank chief Jens Weidmann, speaking shortly after Draghi at the same event, avoided the issue. Draghi's comments lifted a measure of the market's long-term inflation expectations off one-month lows. The five-year, five-year breakeven forward - which now shows where markets expect 2024 price growth forecasts to be in 2019 and is watched by the ECB to gauge its market credibility - rose to 1.81 percent from 1.80 percent before the speech.
The measure was almost 1.90 percent less than two weeks ago. Draghi noted the volatility of inflation-linked financial products and said he wanted to focus on the risk that overly weak price growth becomes embedded in inflation expectations. "Draghi's latest comments go some way to bridge the markets' perception of the ECB's weaker deflation-fighting credibility compared to the Fed and Bank of Japan's heavy QE activism in recent years," said Lena Komileva, chief economist at G+ Economics. "But in the end, it is what the ECB does, rather than what it says, that will determine its credibility."