December 20, 2018 / 9:42 AM / 9 months ago

UPDATE 3-Investors pile back into German debt after Fed meeting

* Fed raises rates, signals more hikes, disappoints doves

* 10-year Bund yields fall to lowest since May 29

* Italy bond yields extend falls (Updates prices, adds move in UST yields)

By Virginia Furness

LONDON, Dec 20 (Reuters) - German bond yields fell to near seven-month lows on Thursday, as investors bet that the Fed’s decision to raise U.S. interest rates and commit to more tightening next year could stifle growth and force it to reverse course sooner rather than later.

Bund yields followed U.S. Treasury yields, which fell to more than eight-month lows after the Federal Reserve lowered projections on Wednesday for rate hikes next year. U.S. Treasury yields hit fresh lows on Thursday.

While the Fed signalled a slightly softer stance on rates it was not soft enough for investors, reflected by the fall in global bond yields as well as a Wall Street-led slide in world stocks.

“Markets were anticipating a more dovish rate hike, that is crystal clear,” said Christoph Rieger, rates strategist at Commerzbank. “The Fed signalled that they were monitoring developments, but they could become self-fulfilling.”

Mark Dowding, a senior portfolio manager at BlueBay Asset Management, said that if Fed chief Jerome Powell was going to deliver a message that was a bit more hawkish than the market was expecting when there were concerns about economic growth, he should have sounded more confident on the outlook.

“What you don’t want to do is say we’re uncertain about the outlook but we’re going to raise rates anyway – that is a bit of a miscommunication,” Dowding said.

The European Central Bank has now ended its stimulus scheme, adding another layer of uncertainty to the euro zone bond market.

Germany’s 10-year bond yield briefly fell 4 basis points to 0.203 percent, its lowest level since May 29 when Italy was gripped by a political crisis. It was last trading at 0.23 percent, just a touch lower on the day.

The bid for Bunds also extended to the long end, with the 30-year yield hitting a two-year low of 0.82 percent . Other high-grade euro zone bond yields were up to four basis points lower.

Italian bond yields meanwhile extended heavy falls from Wednesday, after Rome reached an agreement with the European Union over its 2019 budget. The 10-year yield fell a further 4 bps to a three-month low of 2.72 percent and its spread with Bunds briefly narrowed to around 248 bps - the tightest since late September.

In a sign of the challenges ahead for Rome, data from the Bank of Italy showed foreign holdings of Italian government bonds had fallen by 72 billion euros since the populist coalition emerged in mid-May.

Moody’s on Thursday said Italy could face more significant challenges driven by domestic political and economic developments, rather than the withdrawal of ECB support.

Reporting by Virginia Furness; Additional reporting by Dhara Ranasinghe; Editing by Jane Merriman, John Stonestreet and Toby Davis

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