UPDATE 3-German 10-yr yield slumps to -0.30% on Draghi's stimulus klaxon

German bond yields hit record lows deep in negative territory and French 10-year yields turned negative for the first time on Tuesday after the European Central Bank chief said there would be more stimulus if inflation failed to pick up. The ECB will need to ease policy again, possibly through new rate cuts or asset purchases, if inflation does not head back to its target, Mario Draghi told the ECB's annual conference in Sintra, Portugal.

His remarks accelerated the dash for bonds, already in play as investors fret about the world economy, the impact of trade wars and the simmering Iranian-U.S. tensions in the Gulf. "We're not that far from a 'whatever it takes' moment in the sense that the key message was they will do whatever it takes to avoid a worsening of macro conditions by year-end," said Didier Borowski, head of global macroeconomic research at Amundi.

Germany's 10-year government bond yield, the benchmark for the bloc, fell over seven basis points to a record low of minus 0.326%. Five-year German yields slid 9 bps in their biggest one-day drop since June 2016. Across the bloc, 10-year bond yields hit new lows.

French and Austrian 10-year yields entered negative territory for the first time ever, while the Draghi effect also sent U.S. 10-year Treasury yields to their lowest since September 2017. "He has been quite bold - not that all these measures were not already hinted at, but today is probably the first time we hear directly from Draghi that all these tools are considered available," said UniCredit rates strategist Luca Cazzulani.

"We are facing a difficult situation globally and inflation expectations in the eurozone are extremely low. Also, the markets are pricing in bold action from the Fed; in this environment, it is difficult for the ECB to stand still." A closely watched survey by the ZEW Institute showed the mood among German investors deteriorated sharply in June.

Money market investors now fully price in an ECB rate cut for December 2019 for the first time. Just two weeks ago, investors priced a 60% chance of a 10 bps rate cut by the end of the year. The euro weakened across the board, falling to a two-week low versus the dollar and to a 1-1/2 week low versus the Swiss franc.

The main eurozone stocks index reversed early losses as the euro fell. It was last up 1.3%. Inflation expectations, on the other hand, were boosted by talk of more stimulus, with a key market gauge the five-year, five-year break-even rate rising sharply to 1.2092% from 1.144% on Monday.

Italian debt outperformed, with yields dropping 13-19 bps across the curve; the euro zone's third-largest economy is seen as one of the biggest beneficiaries of ECB largesse. "From our perspective, the ECB doesn't need to rush into action," said Marchel Alexandrovich, European Financial Economist at Jefferies. "There is still room to sit back and watch the data."

Italy's 10-year bond yield was 18 bps lower at 2.10% and set for its biggest one-day drop in just over a year. Its closely-watched spread over Germany was at its tightest level since March at around 242 bps.

These yields may have also been pushed lower by some conciliatory comments from Finance Minister Giovanni Tria. Tria said Italy would cut spending to meet its fiscal deficit targets this year and could reach an agreement with the European Commission over its budget plans.