By Marius Zaharia and Emelia Sithole-Matarise
LONDON Jan 29 German government bond yields
fell on Wednesday with the sale of a new 10-year Bund drawing
strong demand fueled by growing worries about the global impact
of emerging market ructions.
Demand at the 4.175 billion euro auction rose from previous
auctions even as yields in the secondary market traded at their
lowest in over five months and as the U.S. Federal Reserve was
expected to trim its bond-buying stimulus by a further $10
billion a month.
Safe-haven bunds outperformed other euro zone bonds on
increasing concern that another cut in U.S. monetary stimulus
could expose the weakness in some emerging countries' finances
and exacerbate the sell-off in their markets.
Not only the size of demand at the German debt sale
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,
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.
"We've been sitting on a wave of risk-on for so long now
that it's reversing quite abruptly on the emerging market
problems," said David Keeble, global head of fixed income
strategy at Credit Agricole. "People were a little bit short
Treasuries, Bunds but now there's no reason to be. So just lock
all the hatches and wait for the storm."
The fact that markets had several months to prepare for Fed
stimulus withdrawal and speculation of further European Central
Bank policy easing amid low inflation were also keeping Bund
yields anchored, some in the market said.
Bund futures rose 44 ticks to settle at 142.90
while cash 10-year yields were last 3.5 basis
points lower at 1.64 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 ground higher.
Greek yields last traded 5 bps up at 8.72 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."