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Greek yields dip as emerging market sell-off eases

LONDON, Jan 28 (Reuters) - Greek yields slipped on Tuesday as the selloff in riskier assets paused, but they remained near 2014 highs with the country seen as the most vulnerable in the euro zone to contagion from emerging market turbulence.

The rout in emerging currencies that hit Greek bonds in recent sessions eased as the Turkish central bank announced an emergency meeting that many in the market expect will see it deliver an interest rate hike to bolster the lira currency.

The market, however, remained edgy with many reluctant to increase exposure to higher-yielding bonds on persistent worries that a cut in U.S. stimulus could rekindle the selloff in emerging markets.

Greek 10-year yields were last 13 basis points down at 8.50 percent, having risen as high as 8.90 percent on Monday. Yields on similarly junk-rated Portuguese bonds were 9 bps lower at 5.11 percent.

"We are coming back a little bit now in risky assets. But given the nature of emerging markets it's difficult to rule out that it's over," said Philip Tyson, a strategist at ICAP.

"All these risky assets got hit and Greece being one of the riskiest in Europe was hit the worst. There's room for it to come back a little bit further if we start seeing a little bit more stabilisation creeping into emerging markets."

The tentative recovery in higher-yielding assets helped Italian and Spanish yields resume their falls, supported by 16.8 billion euros in coupon and debt repayments due from both countries this week expected to be reinvested into the bonds.

Italian 10-year yields were last off 5 bps at 3.85 percent, with a sale of inflation-linked bonds later in the day expected to fare well. Spanish equivalents were 4.4 bps lower at 3.72 percent.

Among higher-rated euro zone bonds, German Bund futures shed 27 ticks on the day to 142.28, pushing cash 10-year yields 2.2 bps higher to 1.69 percent.

German yields are seen grinding higher on some expectations that the Fed could this week maintain or reduce its monthly bond buying by a further $10 billion despite the latest turmoil in emerging markets. It announces its policy decision on Wednesday.

"We see good reason for the Fed to stand by its pace of 'tapering'. The recent deterioration in emerging markets will not prompt the Fed to alter its policy, in our view," BNP Paribas strategists said in a note.