* Demand for new German bond strong after rise in yields
* First German euro bond to carry restructuring clause
* Bunds rally after auction
By Emelia Sithole-Matarise
LONDON, Jan 9 (Reuters) - Investors snapped up 4 billion euros worth of new five-year German bonds on Wednesday, lured by higher yields after a recent sharp sell-off in the euro zone's lowest-risk debt.
The bond maturing in February 2018 drew bids worth 1.8 times the amount allocated, slightly less than at the previous five-year sale in November and a 2012 average of 1.96 times.
It sold at an average yield of 0.53 percent, compared with 0.42 percent last time. For details see
German bond prices slid last week after a deal to avert a U.S. fiscal crisis cooled demand for safe-haven debt, driving five-year yields up 20 basis points to their highest in more than a month.
The deal and tentative signs the world's biggest economy was on a recovery path spurred the sell-off but demand for German debt recovered this week as the higher yields attracted investors and with the euro zone economic outlook still fragile.
"Demand was quite good. The market has been supported by the last jump in yields ... It means the sell-off last week may have gone too far and investors used it as an opportunity to go back into core markets," said ING strategist Alessandro Giansanti.
Expectations that the European Central Bank will keep interest rates at record lows at its policy meeting on Thursday also helped to prop up demand for the German debt.
Shorter-dated German debt is highly sensitive to shifts in ECB monetary policy and investors would be looking to signals from policymakers on Thursday on when next the bank would cut borrowing costs.
The German Bund future rose 24 ticks on the day to 143.66 from 143.48 before the sale while five-year yields were 3 basis points lower at 0.46 percent in the secondary market, unchanged from before.
Demand at bond sales from the Netherlands and Austria on Tuesday show investors remain keen to hold safer euro zone assets even though the higher yields offered by Italian and Spanish bonds, combined with backstop of the promise of ECB intervention, has driven them back into those markets.
"With today's auction what we see is there's still caution out there but given there's just so much liquidity out there we can see Bunds performing well and at the same time as other core and semi-paper," said Michael Leister, a strategist at Commerzbank.
The new five-year bond is Germany's first denominated in euros to include a collective action clause (CAC), intended to make it easier to restructure government bonds in a crisis.
All new euro zone government bonds issued from the beginning of this year will carry CACs, the first time that such legal provisions have been included routinely in a developed market.
The Netherlands issued the bloc's first euro-denominated bond with the new provision on Tuesday.