Greek yields drop as Turkey eases emerging market tensions

LONDON Wed Jan 29, 2014 3:45am EST

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LONDON Jan 29 (Reuters) - Greek bond yields fell on Wednesday after a blockbuster move by the Turkish central bank to hike interest rates stalled an emerging market rout that has hit the euro zone's weakest member.

Ignoring opposition from Prime Minister Tayyip Erdogan, Turkey's central bank raised rates by far more than economists had forecast in a bid to lift the lira currency off record lows.

Turkey was one of the epicenters of the recent emerging market sell-off. Currencies in Argentina and Russia also hit record lows last week on worries of an economic slowdown in giant China and a gradual reduction in U.S. monetary stimulus.

This spilled over into Greece, and to a lesser extent Portugal - the lowest-rated euro zone countries, whose debt markets are heavily influenced by investors with mandates to buy high-yielding emerging market assets.

Greek yields rose sharply in recent days and the performance of Portuguese bonds was mixed. Other peripheral bond yields held broadly steady.

"Greece is closer to emerging markets," said Jan von Gerich, chief analyst at Nordea in Helsinki.

"You don't have the developed market investor base in Greece any more. Portugal also meets these criteria, although it is changing a bit now. It is moving away from that."

Greek 10-year yields fell 14 basis points to 8.53 percent, extending a retreat from 2014 highs of 8.90 percent hit on Monday. Equivalent Portuguese yields fell 4 bps to 5.10 percent.

The bigger peripheral countries, Spain and Italy, have been largely unscathed in the past week, in a further sign that investors do not see the same risks there as at the height of the euro zone debt crisis in 2011 and 2012.

Greek and Portuguese bonds were the biggest movers in the euro zone on the day. Others moved sideways as many investors stayed sidelined before a U.S. Federal Reserve monetary policy decision later in the day.

The Fed is expected to reduce the pace of bond-buying by a further $10 billion a month.

"You would think there should be more calm today ... on the back of Turkish developments," one trader said.

BUND AUCTION

Germany will sell new 10-year bonds on Wednesday, just as yields on Bunds, the euro zone's benchmark, trade around multi-month lows as the emerging market tensions fuel flows into safe-haven assets.

"At current levels maybe investors will be a bit less interested (in Bunds)," DZ Bank rate strategist Christian Lenk said. "Whatever happens at the auction, though, I would not read too much into it. The Fed meeting ... is going to be the main market mover irrespective of how the auction goes."

Bund yields were 1 bps higher on the day at 1.69 percent, having traded just below 2 percent at the start of the year. Bund futures fell 10 ticks to 142.36.

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