August 20, 2018 / 7:48 AM / 8 months ago

Investors hold on to German debt as Turkey questions linger

* German, French yields hover near one-month lows

* Turkey currency crisis raises questions over emerging markets

* Investors look to Jackson Hole meeting of central bankers

* Euro zone periphery govt bond yields

By Abhinav Ramnarayan

LONDON, Aug 20 (Reuters) - 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 percent at 6.06 per dollar in early trade — worries of contagion to other emerging markets kept the bid for high-grade euro zone 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 11.2 percent 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 U.S. rates are to increase, this also can affect emerging markets badly,” he added, referring to the meeting of central bankers this Friday when U.S. Federal Reserve chief Jerome Powell is scheduled to speak.

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

Germany’s 10-year government bond yield, the benchmark for the euro zone, was more or less flat at 0.305 percent, and still close to a one-month low of 0.287 percent hit late last week.

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

Most lower-rated euro zone 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 fallout from a debt crisis.

On Monday morning, Greek 10-year bond yields were unchanged at 4.38 percent, but trade in Greek bonds tends to only get underway a little later in the session. (Reporting by Abhinav Ramnarayan; Editing by Kirsten Donovan)

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