LONDON: Germany's 10-year bond yield hit a record low of below zero on Thursday as global bond markets rallied on fading expectations for U.S. rate rises after the Federal Reserve held rates and lowered economic growth forecasts.
U.S. Treasury yields hit four-month lows and were not far off their lowest levels in almost four years. That helped narrow the gap between 10-year U.S. and German yields towards its tightest level in about four months.
"Markets just keep trimming back their rate-hike expectations and Fed officials themselves are lowering their expectations," said Commerzbank interest rate strategist David Schnautz.
While the Fed signalled it still planned to raise rates twice in 2016, six of its 17 policymakers projected just one increase this year. Only one had done so when economic forecasts were last issued in March.
Fed funds futures show investors now see a less-than-10-percent chance the Fed will hike rates at its July meeting and a less-than-50-percent chance of an increase by the end of the year, according to CME Group's FedWatch tool.
A scaling back of U.S. rate-hike expectations means the divergence between U.S. and European monetary policy appears less stark than it did a few months ago.
This should allow U.S. Treasury yields to further narrow the gap with German peers, analysts said.
U.S. 10-year yields hit a four-month low of around 1.54 percent, squeezing the spread over German 10-year Bund yields to around 157 basis points and close to the tightest levels in almost four months.
German 10-year bond yields hit a new record low of minus 0.034 percent.
Jitters about Britain's referendum on remaining in the European Union, just a week away, the European Central Bank's ultra-loose monetary policy and concerns about global growth have all fuelled German bonds market gains.
A decision by the Bank of Japan to refrain from delivering more stimulus at a meeting on Thursday knocked Asian stock markets, with Japan's Nikkei down 3 percent. Japanese 10-year government bond yields hit a record low of minus 0.21 percent before the BOJ announcement.
European stocks opened broadly lower, providing another incentive to buy safe-haven bonds.
Thirty-year German bond yields fell to 0.50 percent - their lowest level in more than a year and five-year yields touched a new record low at minus 0.49 percent .
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