A cyclist passes the Federal Reserve building in Washington. Reuters
LONDON: Germany’s 10-year bond yield hurtled towards zero per cent 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 per cent, its lowest in over two years and bringing it closer to zero per cent. The U.S./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 eurozone, 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.