European Central Bank President Mario Draghi inspired a surge in European bonds that sent yields across the region to record lows and pushed Germany's five-year borrowing costs below zero for the first time.

From Ireland and France to Portugal and Belgium, 10-year yields reached new lows after Mr Draghi was quoted by German newspaper Handelsblatt as saying he can’t exclude the risk of deflation, fuelling bets officials will soon start buying sovereign debt.

With the rally extending, investors are demanding the lowest yield premium to hold Spanish securities instead of benchmark German bunds since 2010. “The market’s verdict right now seems to be that Draghi’s ECB will act swiftly,” said Christoph Rieger, head of fixed-rate strategy at Commerzbank in Frankfurt.

“If that is the case spreads can compress further and we stick with our strategic overweight of the peripheral countries. The bund yield lows are ahead of us even though we’ve just seen new lows over the past few days.”

An overweight position is one in which an investor holds a bigger percentage of a security than is contained in the indexes used to monitor performance.

Ireland’s France’s 10-year yield dropped as low as 1.164 per cent, France’s reached 0.784 per cent and Belgium’s reached 0.772 per cent.

Greece’s three-year notes rose for the first time in five days, after tumbling in December as the nation moved closer to snap elections.

Bloomberg