By Marius Zaharia
LONDON Jan 29 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.
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."