* Investors bid for twice the amount at German auction
* German yields up to four years close to zero
* Markets attach higher probability of ECB QE
(Updates with German auction details, new comment)
By Marius Zaharia
LONDON, Aug 20 German two-year debt yields held
close to 15-month lows just below zero on Wednesday, with record
low money market rates and expectations of easier ECB monetary
policy underpinning demand at an auction of similarly-dated
Germany sold over 4 billion euros of a new two-year bond,
with demand from investors double that amount despite the
average yield and the coupon both being zero.
Data last week showing the euro zone economy stagnated in
the second quarter even before the impact of sanctions imposed
on and by Russia over the conflict in Ukraine cemented
expectations European Central Bank interest would stay ultra-low
for a long time.
It has also rekindled expectations the ECB could eventually
print money to buy debt, or in market jargon, do quantitative
easing (QE). A Reuters poll this week showed money market
traders saw a 50 percent probability of QE in the next 12
months, up from a one-in-three chance in last week's survey.
"We've seen really bad growth numbers and these translate
into deflation fears, which in turn fuel QE expectations," said
Felix Herrmann, a market strategist at DZ Bank, adding that
geopolitical risks also supported demand at the German auction.
"All that argues for lower German yields for shorter and
medium term maturities. There are few, if any, reasons for Bund
yields to rise."
Two-year bonds yield minus 0.004 percent in the
secondary market, meaning buyers will get slightly less money
than they invested when the bond comes due. They first traded
negative at the height of the euro zone debt crisis in 2012.
Only five-year German bonds and longer yield more than zero.
Some banks may prefer to buy such assets rather than being
charged 10 basis points for keeping the money in the ECB's
deposit facility - a result of the central bank's unprecedented
deposit rate cut into negative territory in June.
"This is a combination of expectations of very low rates for
a very long period of time but also a reflection that the market
has raised the odds of the ECB being drawn into taking more
serious action," said Elwin de Groot, a senior market economist
at Rabobank in Utrecht.
The overnight bank-to-bank Eonia lending rate fell
to a new record low of 0.005 percent, reflecting abundant spare
cash in the euro zone banking system. So-called excess liquidity
is around 134 billion euros and the ECB is set to make up to 1
trillion euros of cheap loans (TLTROs) available from September.
ECB easing expectations pushed other euro zone yields lower.
Spanish, Italian and Portuguese 10-year yields were down 2-5
(Reporting by Marius Zaharia, editing by Nigel Stephenson)