LONDON: German government bond yields hovered near one-month lows on Monday as investors held on to one of the safest assets in the world given the uncertainty around Turkey’s currency crisis and what implications it may have for other emerging markets.

Stock markets and low-rated bonds were in demand while the dollar fell ahead of trade talks between the United States and China, with investors increasingly optimistic that trade tensions between the world’s two largest economies would recede.

But with the Turkish Lira still looking vulnerable – it was down 3 per cent at 6.20 per dollar – worries of contagion to other emerging markets also kept the bid for high-grade eurozone bonds strong.

“The question this week is whether only Turkey is affected or central banks see any risk of the whole emerging market sector being affected,” said DZ Bank rates strategist Daniel Lenz.

He pointed to weakness in South Africa’s rand in recent weeks — the currency has fallen 11.2pc against the dollar since the start of August – as one sign that there could be some contagion.

“With Jackson Hole coming up, investors would be concerned about whether US rates are to increase, this also can affect emerging markets badly,” he added, referring to the meeting of central bankers this Friday when US Federal Reserve chief Jerome Powell is scheduled to speak.

Any sharp rise in US rates could affect emerging market borrowing costs as investors looking for yield would likely switch to higher-yielding US Treasuries, which are seen as safer than emerging market debt.

Germany’s 10-year government bond yield, the benchmark for the euro zone, was flat at 0.30pc, and still close to a one-month low of 0.287pc hit late last week.

Some of the bid for this debt may also have to do with Germany’s own exposure to the Turkish economy. The country’s top policymaker Jens Weidmann pointed out this weekend that Turkey was number 16 on the list of German trading partners.

Other high-grade euro zone bond yields were also near recent lows. French 10-year borrowing costs for example dipped a basis point to 0.65pc, level with a four-week low hit on Friday.

Improved risk sentiment meant that low-rated southern European bonds outperformed, with Spanish, Italian and Portuguese 10-year bond yields lower 5-7 basis points across the board.

Moody’s said it was extending its review of Italy’s Baa2 rating for a potential downgrade, though this did not have an immediate impact on yields.

Published in Dawn, August 21st, 2018