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Eurozone bond yields fall as markets cheer halt in US rate hikes

London

EUROZONE government bond yields fell on Thursday, with German yields flirting with their lowest levels since late 2016 after the US Federal Reserve abandoned projections for any rate hikes this year given signs of an economic slowdown.

At the end of a two-day meeting on Wednesday, the Fed also said that it would halt the steady decline of its balance sheet in September.

The news sparked the biggest one-day fall in US 10-year Treasury yields since Jan 3. They fell to a fresh 14-month low around 2.51 per cent on Thursday, setting the tone for the European session.

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Germany's benchmark 10-year bond yield fell three basis points (bps) to 0.048 per cent, matching more than two-year lows hit earlier this month.

"What the Fed did by shelving rate hike bets this year and ending the balance sheet reduction went further than what many had expected," said KBC rates strategist Mathias van der Jeugt. "More and more investors will take this as a signal that this is the end of the rate hiking cycle."

Other eurozone bond yields also tumbled 2-3 bps on the day.

But the move in eurozone bond yields was less marked than that in the US Treasury markets, given hefty moves in the wake of the European Central Bank's (ECB) meeting earlier this month.

German and French 10-year bond yields are down around 13 bps each this month, and analysts no longer rule out a move in German long-dated yields back below zero percent.

The ECB took markets by surprise on March 7 with an unexpectedly dovish tone at its meeting - pushing back the guidance on when it expects to raise rates further into the future and unveiling a new round of cheap loans to banks earlier than many analysts had anticipated.

Analysts said that the Fed also proved more dovish than expected.

"We think the bar for initiating hikes this year - already high to begin with - is now higher still, and would likely require a re-acceleration in growth and material rise in spot inflation to compel the Fed to do so," Andrew Schneider, US economist at BNP Paribas, said in a note. REUTERS