LONDON: Germany's 10-year bond yield hurtled towards zero percent on Thursday, dropping to its lowest since late 2016, a day after the US Federal Reserve abandoned projections for any rate rises this year given signs of an economic slowdown.
The Fed also said on Wednesday it would halt the steady decline of its balance sheet in September, in what proved to be a more dovish-than-anticipated Fed meeting.
The news pushed US 10-year Treasury yields to 14-month lows in the biggest one-day fall since Jan. 3. They reached new lows in European trade on Thursday, dragging European bonds down with them.
Germany's benchmark 10-year bond yield fell four basis points to 0.039 percent, its lowest in over two years and bringing it closer to zero percent. The US/German 10-year bond yield gap narrowed to its tightest since mid-January and was last seen around 247 bps.
"The Fed couldn't have been more Treasury market friendly short of calling the next recession and signalling rate cuts," said John Davies, G10 rates strategist at Standard Chartered Bank in London.
"It's fully understandable why we're back at these levels in German Bund yields given what has happened at the Fed and Treasury yields."
Across the euro zone, long-dated bond yields fell as much as six bps on the day.
"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."
The Fed's policy action provided fresh impetus to a sharp fall in government borrowing costs in the euro area, sparked by the more-dovish than expected ECB earlier this month.
German and French 10-year bond yields are down around 14 bps each this month.
"Given how entrenched the downtrend in the Bund yield appears to be, hitting zero percent wouldn't be a surprise," Davies at Standard Chartered said.
But by being as dovish as it has been, he said, the Fed may create conditions for a turnaround in economic growth and sentiment that could ultimately push German yields higher from here.
British 10-year bond yields tumbled over seven bps to their lowest since September 2017, amid ongoing negotiations over Brexit and fears of a no-deal Brexit.
British Prime Minister May has asked European Council President Donald Tusk to delay Brexit from March 29 until the end of June and said she was preparing for a third vote in the British parliament on the exit deal she arduously negotiated with the European Union.
Traders are increasingly worried that in the likelihood of her deal failing for a third time to pass parliament next week, a host of possibilities open up, none of which are positive for markets in the short term.
Banks' probability metrics of a no-deal Brexit remain low and haven't changed in recent days - Berenberg, for example, maintain their probability at a slim 15 percent.
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