Germany got bids for more than the maximum 5 billion-euro ($6.3 billion) target at a note sale, with the yield falling to a record, as investors sought a refuge from the European debt crisis.
Germany, the only country in the euro area with a stable outlook on its AAA rating, sold 4.56 billion euros of two-year securities carrying a zero-percent coupon for the first time, Bundesbank data showed today. The securities were auctioned to yield 0.07 percent. The country offered a fixed-interest payment of 0.25 percent when selling similar-maturity notes on April 18.
Germany's borrowing costs have plunged to the lowest on record as investors sought the nation's debt as a haven from Europe's financial turmoil and concern mounted that Greece will exit the euro area after inconclusive elections on May 6.
“The surprisingly good result illustrated a huge demand for safety, and that's the key message of the auction result today,” said Ciaran O'Hagan, the head of European interest-rate strategy at Societe Generale SA in Paris. “This is the first time we have seen a large, liquid, benchmark bond issued with a coupon of zero. That is symbolic of the desperate need for security in today's troubled times.”
Investors also bought 1.29 billion euros of index-linked bonds due in 2013 at a so-called real yield of minus 0.24 percent.
The Federal Finance Agency, which manages debt sales on the government's behalf, said after the auction that the zero coupon represents the floor in rates for German securities as it has no intention to issue bonds with negative coupons.
Germany's existing two-year note yield tumbled to a record 0.031 percent on May 18. Ten-year yields dropped six basis points, or 0.06 percentage point, to 1.41 percent at 12:12 p.m. London time, after reaching a record-low 1.396 percent, also on May 18.
Germany's government bonds returned 1.4 percent this month, compared with a 0.2 percent loss from Italian securities, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Greece's bonds slumped 36 percent while Spain's lost 1.8 percent, the indexes showed.
'Extreme Nervousness'
The average yield on German bonds dropped to 1.43 percent on May 17, the lowest since at least 1992, according to Bloomberg and EFFAS indexes. A post-Greek-election poll of 1,253 Bloomberg subscribers found 57 percent expect at least one country to leave the monetary union this year.
“Demand was strong and this was a very good result for the safe-haven issuer of bunds,” said Carl Heinz Daube, a managing director of the Frankfurt-based FFA. “The result gives, at the same time, a picture of extreme nervousness.”
The sales took place as European leaders prepare to discuss the region's debt crisis at a summit today. Deepening concern Greece will exit the euro has wiped out $4 trillion from equity markets worldwide this month and pushed average yields on Spanish debt up 40 basis points.
Greece is in the fifth year of a recession that has been amplified by austerity measures linked to its international aid, with the unemployment rate reaching 21.7 percent in February. A caretaker government was sworn in last week to lead the country to new elections on June 17 after an inconclusive poll propelled the Syriza party, which wants to annul the bailout, into second place.
Bloomberg News
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