Spain's 10-year yield fell eight basis points to 4.07 percent, the biggest fall since Oct. 22. The rate on the nation's two-year notes dropped eight basis points to 1.45 percent.

Inflation Slows

Data released on Oct. 31 showed the annual inflation rate in the 17-nation currency bloc fell to 0.7 percent, the lowest since November 2009.

The ECB now has just one more quarter-point cut left before reaching zero, increasing the likelihood of unconventional tools such as quantitative easing or a negative deposit rate if prices slow further or the economic recovery stalls. Euro-area inflation is less than half the ECB's 2 percent target, and unemployment is at the highest level since the currency bloc was formed in 1999.

The ECB kept its deposit rate at zero and trimmed the marginal lending rate to 0.75 percent.

Pledging to keep borrowing costs low for an “extended period,” Draghi said weakening price pressures justified the ECB's surprise decision to cut its main interest rate.

“We may experience a prolonged period of low inflation,” Draghi told reporters after the central-bank decision.

The additional yield, or spread, investors demand for holding Italian 10-year bonds vs. their German equivalents narrowed four basis points to 242 basis points after dropping to 236 basis points, the least since Oct. 24. Spain's 10-year yield spread over Germany tightened three basis points to 238 basis points.

“The strong gain in peripheral bonds today reflects a market theme that looser policy and more liquidity will benefit countries like Italy and Spain more than core countries like Germany,” said Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London. “We expect the yield spread tightening trend to continue.”

Spain sold 1.14 billion euros of 10-year securities today at the lowest auction yield in more than three years. The Madrid-based Treasury allotted the 2023 bonds at an average yield of 4.164 percent, compared with 4.269 percent at a previous sale on Oct. 3. Investors bid for 2.57 times the amount of debt on offer versus 1.96 times in October.

Unlimited Cash

Draghi said that the central bank will extend its unlimited offerings of one-month and three-month cash until the middle of 2015.

“We continue to monitor closely money market conditions and their potential impact on our monetary policy stance,” Draghi said. “We are ready to consider all available instruments.”

Germany's 10-year yield fell five basis points to 1.69 percent. The two-year rate dropped five basis points to 0.09 percent after declining to 0.05 percent, the least since May 31.

The German 10-year break-even rate dropped three basis points 1.54 percentage points, matching the lowest since June 25, based on closing prices. The rate, a gauge of inflation expectations, is derived from the yield difference between bunds and index-linked securities.

Five-year inflation swap rates, a market gauge of price- growth expectations over that period, declined to 1.34 percent on Nov. 1. That's within one basis point of the level reached in June last year, which was the lowest since December 2008. The rate slid two basis points to 1.37 percent today.

The implied yield on Euribor contracts expiring in December 2014, a measure of the outlook for three-month money-market rates, fell seven basis points to 0.345 percent, after dropping to 0.27 percent.

Italian securities gained 6.4 percent this year through yesterday, according to Bloomberg World Bond Indexes. Spain's returned 11 percent, while Germany's lost 1.3 percent.

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