UPDATE 1-Euro zone bond yields set for biggest daily fall in October on Fed cut, trade war

Eurozone bond yields were on track for their sharpest daily fall in October on Thursday, tracking U.S. Treasuries after the Federal Reserve cut interest rates and as doubts about U.S.-China trade negotiations drove demand for safe-haven assets. The Federal Reserve on Wednesday cut its benchmark rate by a quarter of a percentage point to 1.50%-1.75% to help the U.S. weather the global trade war. However, it also dropped a reference in its policy statement to acting "as appropriate" to sustain economic expansion - language considered a sign of future rate cuts.

Chairman Jerome Powell said some of the risks that had convinced Fed officials lower rates were needed if only as insurance, seemed to abate in recent weeks. Chinese officials have doubts about whether it is possible to reach a comprehensive long-term trade deal with Washington and U.S. President Donald Trump, Bloomberg reported on Thursday, citing unnamed sources.

Chinese officials have told visitors to Beijing and others in private conversations that China will not budge on the thorniest issues, the report said. "It might seem ...surprising as the Fed delivered a hawkish cut," said ING senior rates strategist Antoine Bouvet of Thursday's fall in yields. "But the market had moved probably too high into the meeting in terms of yields. The market might not share the Fed's optimism on the economy."

Most eurozone 10-year bond yields were down around 5 basis points on the day. Germany's benchmark 10-year yield was down to -0.41% and set for its biggest daily fall in October, as was the case for most other eurozone government bonds.

Eurozone government bonds were following U.S. Treasuries, where the 10-year yield is down 10 bps over the last two days, largely driven by the Fed cut. Despite Thursday's falls, bond yields will be ending October sharply higher, mostly driven by expectations that Britain will avoid a no-deal exit from the European Union.

Germany's 10-year yield was set for its biggest monthly jump since January 2018, up 17 bps in October. With the Fed and trade tensions dominating, eurozone bonds showed little reaction to third quarter eurozone economic growth data, which defied market expectations of a slowdown and was steady quarter-on-quarter, preliminary data showed on Thursday.

Meanwhile, headline inflation slowed because of a sharp fall in energy prices. Elsewhere, the first fixing of the euro zone's first overnight rate ESTR following the implementation of the European Central Bank's tiered interest rates was unchanged at -0.545%.

Analysts are watching the impact of tiering on money markets, as the system, which exempts banks from paying the ECB the deposit rate of -0.50% on part of their excess cash, had stoked fears that short-term interest rates could increase.

Also Read: The Federal Reserve is waiting for a U.S.-China 'Phase One' trade deal too