UPDATE 1-German 10-year yield hurtles towards 0 pct as Fed signals rate-hike halt

Germany's 10-year bond yield hurtled towards zero percent on Thursday, dropping to its lowest since late 2016, a day after the U.S. Federal Reserve abandoned projections for any rate increases this year given signs of an economic slowdown.

The Fed on Wednesday also said 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 U.S. 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 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 U.S./German 10-year bond yield gap narrowed to its tightest since mid-January at around 244 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." British 10-year bond yields tumbled over five bps to their lowest since September 2017. 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 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."

The Fed's policy action provided fresh impetus to a sharp fall in government borrowing costs in the euro area sparked by the ECB earlier this month. The ECB surprised markets on March 7 with the dovish tone of its meeting -- extending further into the future when it expects to raise rates and disclosing a new round of cheap loans to banks earlier than many analysts had anticipated.

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 the conditions for a turnaround in economic growth and sentiment that could ultimately push German yields higher from here. (Reporting by Dhara Ranasinghe; editing by Raissa Kasolowsky, Larry King)