German yields dip as new Bund draws strong interest

Wed Jan 29, 2014 8:04am EST

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By Marius Zaharia

LONDON Jan 29 (Reuters) - German government bond yields fell on Wednesday after an auction of a new 10-year Bund drew strong demand, fuelled by growing worries about the global impact of an emerging market sell-off.

Demand at the 4.175 billion euro sale rose from previous auctions even as yields in the secondary market traded around five-month lows and as the U.S. Federal Reserve was expected to trim its bond-buying stimulus by a further $10 billion a month.

Not only the size of the demand impressed, but also the fact that the bond was sold at a better price - and lower yield - than the levels seen in the grey market, where investors traded the paper before it was issued, traders said.

It was an indication that for the time being, investors believed that the Fed's plan to reduce bond purchases may not necessarily lead to a rapid rise in U.S. and German bond yields as initially thought.

On the contrary, the tensions the Fed outlook was causing in emerging markets - where Turkish and other currencies have hit record lows in recent days - could actually redirect funds towards safe haven assets such as German bonds.

"Bunds are also watching emerging markets ... (where the sell-off) is probably in response to Fed tapering," said Rainer Guntermann, a rate strategist at Commerzbank in Frankfurt. "We're in risk aversion mode."

He said the fact that markets had several months to prepare for the eventual Fed stimulus withdrawal and low inflation fuelling speculation of further European Central Bank policy easing were also keeping Bund yields anchored.

Bund yields were 1 basis point lower on the day at 1.67 percent, having traded around 1.70 percent before the auction. For full auction details see

"There will always be people around who think we will see more selling off in emerging markets and enough people who think yields with a 1.6 handle are O.K. in this environment," said Marius Daheim, chief strategist at Bayerische Landesbank.

"Our idea is that yields would move again towards 2 percent and break above that ... We are going to see further improvement of economic data and as the Fed continues tapering, the long-term outlook is negative for Bunds and Treasuries.

GREECE

Greek 10-year yields remained volatile and highly-sensitive to developments in emerging markets.

They started the session lower as a blockbuster move by the Turkish central bank to hike all interest rates improved sentiment towards emerging markets. But as the initial impact of the move in Turkey faded, yields in the euro zone's weakest member turned flat.

Greek yields last traded at 8.69 percent, having fallen as low as 8.50 percent earlier.

Greek bonds have been more sensitive to the emerging market rout than their euro zone peers because the market is heavily influenced by investors with mandates to buy high-yielding assets in the developing world.

"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."

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