January 29, 2014 / 5:00 PM / in 4 years

Emerging market worries fuel demand for German Bunds

By Marius Zaharia and Emelia Sithole-Matarise

LONDON, Jan 29 (Reuters) - 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, 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.

“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.”

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