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Higher valuations and narrow yield spreads mean that increased volatility among Real Estate Investment Trusts will likely persist this year as short-term traders move in and out of the REIT market.
Greek yield spreads (with Germany) rose sharply last week, Portuguese yields have turned higher, and the Spanish spread has also started to widen.
However, with GDP projections now positive and with investors appetite for risk returning we will see yield spreads narrowing over a sustained period which will result in secondary assets performing better on a total return basis.
Greece sold six-month T-bills at a slightly higher yield on Tuesday than a previous February auction, its first borrowing sortie after a three-notch Moody's downgrade to B1 raised yield spreads to near peak crisis levels.
An important research question examined in the credit risk literature focuses on the proportion of corporate yield spreads attributed to default risk.
The level of the yield spreads and changes in these levels were the primary concern.
Key factors in this optimistic outlook include strong demand against limited supply and tightening yield spreads in other asset types, both set against the backdrop of a solid economy.
However, foreign investors buy the bonds and then cash in on yield spreads to make a profit.
Inter-Bank Market Rates: In the final Asian trade, It was hard to find a pulse in the currency market as dealers bedded down for the Christmas holidays, though the mood remains bullish for more dollar gains in the New Year as yield spreads widen in its favour.
Summary: Shrinking liquidity and widening yield spreads could dampen demand