LONDON/BERLIN Oct 17 Germany sold 4.2 billion
euros of two-year debt on Wednesday, drawing strong demand for
its safe-haven bonds as a rise in yields above zero offset the
impact of Spain retaining its investment grade credit rating.
Moody's Investors Service kept Spain's rating at Baa3,
surprising some in the market who had positioned for the country
at the forefront of the euro zone debt crisis to be downgraded
Despite a weaker appetite for the least risky euro zone
assets, the auction received bids worth 2.0 times the amount
allotted to investors, just a shade less than at the previous
sale on Sept. 19, but above the 1.87 average for 2012.
"It's a good amount given the positive news for Spain. Maybe
some people were expecting a lack of interest but 8 billion (of
bids) is a solid amount," ING rate strategist Alessandro
"What's happened is that these yields are now above zero."
Whether investors prefer safe-haven assets, such as German
bonds, or higher-yielding, riskier ones depends for the moment
mainly on developments in Spain.
The recession-hit country is expected eventually to ask for
a bailout -- a move that would allow the European Central Bank
to buy its bonds and lower its borrowing costs.
However, the timing of the request is still uncertain. If
Spain drags its feet, the risk is that the crisis worsens before
it gets better, analysts say.
The prospect of ECB bond buying has, nevertheless, brought
German two-year yields back into positive territory
in recent weeks. The most recent flare-up in the crisis pushed
them to record lows of minus 0.095 percent in early August.
The benchmark September 2014 bond, which
carried a zero percent interest rate, sold at an average yield
of 0.07 percent, compared with 0.06 percent last month and a
0.12 percent average for this year's two-year bond sales.
The ECB's plan is perceived as a significant step towards
tackling the crisis and has complicated sales of longer-term
German bonds, which offer below-inflation returns. Two 10-year
German auctions were technically uncovered in September, meaning
they drew bids worth less than the amount on offer.
However, demand for shorter-term German debt has stayed high
throughout the year. Sensitive to the ECB's monetary policy,
two-year bonds benefit from expectations that interest rates
will remain low for a prolonged period, depressing yields.