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German Bund yields fall to record low

Wednesday, July 11 11:31:41

Germany's cost of borrowing over 10 years fell to a record low at an auction today as investors, worried about the euro zone rescue fund's effectiveness as a crisis-fighting tool, sought the safety of Berlin's debt despite negligible returns.

The government sold 4.153 billion euros worth of Bunds for an average yield of 1.31 percent, the lowest ever on record for the maturity. Investors bid for 1.5 times the volume of paper on offer.

The results underlined markets' lack of faith in measures agreed by European policymakers last month to combat the crisis, including help for Spain's ailing banks and allowing the ESM bailout fund to recapitalise banks and buy sovereign bonds.

Investors worry that Madrid may need a full state bailout, which would stretch the limits of the European Stability Mechanism and leave the bloc defenceless in case the crisis engulfs Italy, one of the largest bond markets in the world.

Prime Minister Mario Monti on Tuesday said Italy could be interested in tapping the fund to ease its borrowing costs.

But even the future of the ESM as it stands is uncertain. Germany's constitutional court agreed on Tuesday to examine complaints against it but gave no date for its verdict, something that could block action for weeks if not months.

"We're very far from a lasting solution to the euro debt crisis," said Investec's fixed income analyst Elisabeth Afseth. "There's not much to be gained in holding German Bunds but it's more of a capital preservation thing."

Bids covering the offer at the sale to the tune of 1.5 times compared with an average of 1.35 percent at 10-year auctions this year, according to Reuters data. The average yield at 10-year debt auctions this year has been 1.723 percent.

Germany will repay bonds and interest worth 40 billion euros this week and the prospect of a further 50 billion euros of payments due next week from triple-A rated countries including France and the Netherlands also boosted demand.

For shorter-dated debt, investors are even willing to pay Germany to park their cash with it. Two-year yields traded in and out of negative territory this week.

In secondary markets, where investors trade the issued debt, 10-year yields stood at 1.31 percent, near a one-month low of 1.299 percent hit on Friday. (C ) Reuters