LONDON, July 25 (Reuters) - German bond yields fell to new record lows, the euro currency hit a two-month trough and stock markets extended gains on Thursday after the European Central Bank signalled rate cuts, asset purchases and tiered interest rates.
The 30-year German government bond yield dropped more than three basis points to a record low of 0.173%, while the spread between Italian and German 10-year government debt shrunk to its tightest since May 2018.
Core European bond yields pushed deeper into negative territory with benchmark 10-year German bond yields falling to a record low of minus 0.417%, according to Refinitiv data.
"Effectively they have eased policy without actually pulling any policy levers," said Stephen Gallo, head of European FX at BMO Capital Markets in London.
"Because they floated the idea of quantitative easing, that's why the euro is lower."
The euro reversed an initial bounce higher and was last down 0.2% on the day at $1.1115, a new two-month low, after the ECB said rates would remain at "present or lower levels" - a signal that markets took to mean a cut is coming in September.
Banking stocks rallied to their highest since May 20 after the ECB signalled a readiness to introduce tiered deposit rates to provide respite to a sector struggling with ultra-low rates.
The index was last up 2.1%, lifting the broader eurozone stocks benchmark which rose 0.7%.
Reporting by London Markets Team; Writing by Tommy Reggiori Wilkes; Editing by Saikat Chatterjee