UPDATE 1-Higher yields entice investors at German debt sale

Wed Jan 16, 2013 6:14am EST

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* Sale of new German 10-year bond sees healthy demand

* Auction attracts bids worth 1.7 times amount allotted

* Past three new Bund auctions had technically failed

By Ana Nicolaci da Costa

LONDON, Jan 16 (Reuters) - A recent rise in German yields attracted healthy demand at an auction of new 10-year government bonds on Wednesday as a sell-off in lower-risk debt this year made returns more enticing.

The 4 billion euro sale of a bond maturing in February 2023 drew bids worth 1.7 times the amount allocated, compared with 1.5 times at a similar sale in November, when yields were lower, and an average of 1.39 times last year.

That was an improvement on the last three new Bund auctions, which technically failed, meaning there was not enough demand to meet the amount of bonds offered.

The average yield at the sale was 1.56 percent, above 1.4 percent at the November auction but below an average of 1.58 percent at similar sales in 2012.

"Overall a good auction but it doesn't come as a major surprise for us given that we've had this spike in outright (yield) levels," Michael Leister, senior strategist at Commerzbank said.

Bund futures briefly crept higher after the auction results but were last flat on the day at 143.29. Ten-year German bond yields were also barely changed at 1.50 percent in the secondary market.

German bonds prices have slid since a last-minute deal at the turn of the year to avert a U.S. fiscal crisis and an upbeat assessment of the prospects for the euro zone economy from the European Central Bank dented appetite for safe-haven debt.

But a 12 basis point rise in 10-year German yields in the secondary market this year has lured back investors, who are still worried about a fragile economic backdrop and want to play it safe. A sale of new five-year bonds drew healthy demand last week for similar reasons.

Despite ECB President Mario Draghi saying last week the euro zone economy would recover later in 2013, recent indicators have given investors reason for concern.

Data on Tuesday showed the German economy was hit hard by the euro zone debt crisis in the final quarter of last year, shrinking more than at any point in nearly three years.

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