March 21, 2019 / 8:17 AM / 4 months ago

Euro zone bond yields fall as markets cheer halt in U.S. rate hikes

* U.S. Fed forecasts no hikes in 2019

* UST yields hit 14-month lows, set tone for Europe

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

By Dhara Ranasinghe

LONDON, March 21 (Reuters) - Euro zone government bond yields fell on Thursday, with German yields flirting with their lowest levels since late 2016 after the U.S. 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 it would halt the steady decline of its balance sheet in September.

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

Germany’s benchmark 10-year bond yield fell three basis points to 0.048 percent, matching more than two-year lows hit earlier this month.

“What the Fed did by shelving rate hike bets this year and end 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 euro zone bond yields also tumbled 2-3 bps on the day .

But the move in euro zone bond yields was less marked than that in the U.S. Treasury markets given hefty moves in the wake of the European Central Bank’s 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 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.

Reporting by Dhara Ranasinghe Editing by Raissa Kasolowsky

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