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Europe’s bond yields slide on hopes of ECB QE

Bond yields across Europe continued to slide Thursday as weak inflation data and hints from the Vice President of the European Central Bank (ECB) boosted hopes of a full-blown sovereign bond-buying program.

Bonds from countries on the so-called periphery of the euro zone performed particularly well, with yields on benchmark 10-year bonds from Ireland, Italy and Portugal hitting 10-year lows. France and Germany's bond yields also slipped.

Bonds
Chris Ratcliffe | Bloomberg | Getty Images

It comes after ECB Vice President, Vitor Constancio, raised hopes of full-blown quantitative easing – also known as QE – on Wednesday.

He said the central bank expected its balance sheet to rise to 2012 levels on the back of measures already agreed, but added the purchase of sovereign debt and "other assets" could be an option if the environment didn't develop as expected.

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There have been concerns, however, that such assets could be overvalued – although Constancio dismissed this concern on Thursday.

"The situation of financial markets in Europe is different from other parts of the world, and there is not the situation of general froth in financial markets in Europe," he told CNBC. Constancio was speaking during a quiet period for ECB policymakers ahead of the central bank's next session and so couldn't comment directly on monetary policy.

But he stressed that concerns over financial stability had to be addressed by "other types of instruments" like using regulation to mitigate the risk – known as macro-prudential policy.

"We are trying to increase our monetary base in order to have channels that will spill over to various types of assets which then can increase the growth and inflation in the euro area as a whole," he added.

Sovereign bond yields haven't just been falling the euro zone, with the cost of borrowing also sliding recently in countries like the U.S. and Australia.

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UniCredit's global chief economist Erik Nielsen said this move "started with Europe".

"It started with Draghi's speech last week which rightly or wrongly – I think rightly – means that the runway has been cleared for take-off, or sovereign QE in Europe," he told CNBC on Thursday. "That's good for Europe, it's good for European bonds – but it's good for the world. Because… the world cannot really afford a Europe in a Japan scenario, with deflation and no growth."

Constancio has previously indicated that the bank would have a clearer idea of the impact of its stimulus efforts to date in the first quarter of next year.

"The ECB's next policy meeting on January 22 is perhaps the most likely date for the launch of QE, though we would not be shocked by a December announcement," Capital Economics' Jonathan Loynes said in a note. "It is our view that the ECB should get on and implement a full-blown QE program incorporating sizeable sovereign debt purchases as soon as possible."