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Investors hold on to German debt as questions about Turkey linger


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 were on the frontfoot and 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 0.6 per cent at 6.06 per dollar in early trade - worries of contagion to other emerging markets 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.

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He pointed to weakness in South Africa's rand in recent weeks - the currency has fallen 11.2 per cent against the dollar since the start of August - as one sign that there could be some contagion to other emerging markets.

"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 are likely to 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 eurozone, was more or less flat at 0.305 per cent, and still close to a one-month low of 0.287 per cent hit late last week.

Other high-grade eurozone bond yields were also near recent lows. French 10-year borrowing costs for example, at 0.66 per cent, were only a shade off a four-week low of 0.653 per cent hit on Friday.

Most lower-rated eurozone bonds have suffered in recent weeks as the Turkey crisis unfolded, including those issued by Greece.

But investors will keep an eye on how those bonds perform this week after the debt-laden nation officially exited its final, three-year bailout programme, agreed in August 2015 to help it cope with the continued fall-out from a debt crisis.

On Monday morning, Greek 10-year bond yields were unchanged at 4.38 per cent, but trade in Greek bonds tends to only get underway a little later in the session. REUTERS

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