* Greek default risk eased but aid doubts support Bunds
* Negative yield at Schatz sale underscores safety bid
* Italy hits auction target despite risk-averse mood
By William James
LONDON, Nov 14 Demand for low-risk German debt
held firm on Wednesday, underscored by a sale of two-year bonds
at a negative yield, as wrangling over Greek aid payments keeps
investors on edge.
Triple-A rated Germany sold 4.3 billion euros of a new
two-year bond that pays no interest, meaning Berlin is
effectively able to borrow for free because investors prize the
country's strong fiscal position and highly liquid debt market.
Bidding at the auction was strong, pushing the yield below
zero. This reflected the recent shift back into safe-haven
assets caused by a revival of concerns over Greece, uncertainty
over whether Spain will seek a bailout and the prospect of slow
"It's a combination of worries about the euroland economy
plus ongoing fiscal concerns in Greece keeping the short end of
the German curve underpinned," said Nick Stamenkovic, strategist
at RIA Capital Markets in London.
While Greece is thought to have averted a near-term default
after selling bills on Tuesday, international lenders disagree
on how Athens can bring its debt down to a sustainable level,
and a deal to release aid payments remains some way off.
"The final decision on the release of the next aid tranche
is delayed, which makes for pretty strong headline risks. All
this suggests Bunds will remain underpinned at these lofty
levels," said Commerzbank strategist Michael Leister.
German 10-year debt futures held broadly steady at
their elevated levels, down five ticks on the day to 143.09 but
looking set to remain close to the two-month high at 143.48 hit
SMOOTH ITALIAN SALE
Despite the risk averse mood, Italy -- one of the euro
zone's struggling peripheral states -- was able to hit its
target of five billion euros with an auction of three-, 11- and
While Italy's high debt levels and political landscape
remain of concern for investors, yields on its bonds are well
below their highs thanks to the European Central Bank's promise
to support the periphery if necessary.
"The result of today's auction underscores the externally
driven resilience of Italy's bond market. Demand was solid and
the yield on the three-year note resumed its downward trend and
is at pre-crisis levels," said Nicholas Spiro, managing director
at Spiro Sovereign Strategy.
Italian bonds had rallied in the run-up to the sale, but the
bid to cover of 1.5 on the three-year paper fell short of
expectations and the bonds subsequently trimmed their gains.
The Italian 10-year yield last stood 2 basis
points lower on the day at 4.96 percent compared to a session
low of 4.92 percent.