The prospect of a bond-buying program to be launched by the European Central Bank (ECB) buoyed stock markets on Wednesday and sent yields on eurozone debt to record lows.

The yield on benchmark German 10-year bonds fell to a record low level of 0.915 percent from 0.939 percent on Tuesday. French 10-year debt also fell to an all-time low, with a yield of 1.249 percent in spite of a surprise reshuffle of the government in Paris on Monday.

Records were also broken in debt-laden Spain and Italy where benchmark bonds fell to 2.097 percent and 2.372 percent respectively.

In addition, the euro broke to an 11-month low $1.3152 in Asian trading before recovering to $1.3180 in European trade.

Speculation about the ECB injecting more money into the eurozone economy pushed funds into bonds before market interest rates fall further. As a result, bond prices were rising and the fixed interests bonds pay fell as a percentage of the higher price.

Last arrow in ECB quiver

Rising bond prices and subsequently falling yields have occurred since remarks by ECB President Mario Draghi on Friday. At a meeting of central bank governors in Jackson Hole, United States, Draghi said the ECB was vigilant about falling inflation in the eurozone. Fresh inflation data due Friday are likely to show a new low of just 0.3 percent, which is way below the ECB's target of close to 2 percent and will further fuel fears of deflation in the currency area.

An ECB asset-buying program, also known as quantitative easing (QE), might halt the trend toward falling prices. The central bank would offer fresh funding for commercial banks in exchange for securities. The money would flow into the economy via loans, and so boost economic growth, employment and, in the end, the rate of inflation.

QE has been used by the US central bank (Fed) following the 2008 financial crisis, and is the ECB's last monetary policy instrument after it has already cut interest rates to a historic low.

German resistance waning

A further loosening of ECB monetary policy, however, is opposed by Germany - Europe's biggest economy and dubbed the engine of growth for the eurozone.

On Wednesday, German Finance Minister Wolfgang Schäuble said he felt the markets had "over-interpreted" Draghi's words.

Latest German economic indicators suggest, however, that the German economy is faltering, too. German gross domestic product (GDP) shrank by 0.2 percent in the second quarter this year - a further sign that the recovery in the eurozone will remain fragile this year. This might lead Berlin to give up its resistance against asset purchases by the ECB.

uhe/sri (AFP, Reuters)