* Draghi sends clearest signal yet ECB could ease policy
* Euro zone bond yields fall across the credit spectrum
* Spanish, Italian yields hit fresh record lows
(Recasts with price moves on Draghi's comments, fresh comments)
By Emelia Sithole-Matarise
LONDON, May 8 Euro zone government bond yields
hit new lows on Thursday after European Central Bank President
Mario Draghi sent his clearest signal yet that the bank could
ease monetary policy next month.
After the bank left rates on hold at its monthly policy
meeting, Draghi said that policymakers were "comfortable with
acting next time" to boost the euro zone economy if price
inflation forecasts warrant it.
The prospect of imminent new ECB stimulus measures gave
fresh impetus for investors to keep scooping up lower-rated euro
zone bonds which offer relatively higher returns than core debt.
Spanish and Italian 10-year bond yields hit the latest in a
series of record lows, dropping 7 basis points on the day to
2.90 percent and 2.94 percent
respectively while Portuguese equivalents at eight-year lows.
German 10-year Bund yields, the benchmark for
euro zone borrowing, fell 3 basis points to 1.45 percent, taking
them to a whisker from 11-year lows plumbed this week.
Money market rates also fell as Draghi's comments bolstered
bets that the bank would act next month, when it has new euro
zone inflation and growth forecasts before meeting.
"He (Draghi) explicitly talked about June, which was a more
tangible hint than we've had. This was the trigger for the
market to rally," said Commerzbank strategist David Schnautz.
"The ECB is reinforcing the underlying trend again of spread
tightening, of investors getting pushed down the credit curve
and up the maturity curve," Schnautz said.
The trend in lower yields has been supported this year by
expectations the ECB will eventually act to tackle low
inflation. That might include asset purchases, though many in
the market say that would be the bank's last resort.
Such expectations helped Spain raise more than targeted and
Ireland secure record-low borrowing costs at debt sales on
"We're in a yield grab-athon," said Grant Peterkin, head of
absolute bond returns at Lombard Odier. "Investors have given up
on the safety aspect ... in search for that yield."
Increased volatility in money markets and dwindling spare
cash in the banking system have helped to make ECB action more
likely. So has a steadily strengthening euro, which threatens
the region's recovery.
Draghi was sanguine on Thursday about recent money market
fluctuations, although he has said "unwarranted" gains in money
market rates could lead to looser monetary policy. He has not
specified how high rates would have to rise to trigger action by
Investors expect the central bank to cut its main
refinancing rate and start charging banks for parking cash with
it overnight - slashing its overnight deposit rate below zero
percent - to force them to lend to the broader economy.
It was also expected to suspend its weekly deposit tenders,
through which it drains money from the banking system to
neutralise the effect of the bond purchases it made at the
height of the euro zone debt crisis.
Such a move would release 167.5 billion euros into the
banking system, a sum equal to the outstanding amount of bonds
the ECB bought under its defunct Securities Markets Programme,
which would subdue money market rates.
"One of the reasons the ECB did not move today may well be
that they do not want empty-gesture policy moves like just
cutting the refi. That in turn puts negative rates and QE/CE
(credit easing) on the table," RBS strategists said in a note.
(Additional reporting by Marius Zaharia; Editing by Larry King)