LONDON Political disarray in Greece and fresh fears about Spain's banks have triggered a scramble for the world's lowest-risk government bonds, with investors willing to accept returns of next to nothing in exchange for shelter from the euro zone storm.
Borrowing costs for Germany, Britain, the United States and Japan have tumbled to record lows at auctions this week, with yields on outstanding debt also shrinking as investors eye events in the bloc's periphery with alarm.
Electoral stalemate in bailed-out Greece, which could lead to a reneging on its aid agreement and to its exit from the euro, and rising costs for fixing Spain's banks have reinforced risk-aversion among investors already nervous about the global economy.
The rejection by voters in Greece, France and Italy this week of parties advocating austerity measures has meanwhile undermined a central plank of euro zone leaders' strategy for resolving the crisis, now in its third year.
On Wednesday, Germany sold more than 4 billion euros of five-year government bonds at a record low cost of 0.56 percent, while the June Bund future hit an all-time high of 143.03 as investors sought out the safest assets.
Demand was lower than at previous auctions, reflecting rock-bottom returns for investors, but the sale showed Germany was still able to borrow in times of market stress and pay much less than other euro zone countries.
"The cover (total bids) was by no means astounding, but then again when you're trying to sell something with a yield of 0.56 percent for five years and yields are down 24 basis points from last time ... what else do you expect?" said Marc Ostwald, a strategist at Monument Securities in London.
Germany's debt agency said the auction result reflected "the volatile market situation which is characterized by great uncertainty".
In Britain, which is in recession and struggling to reduce a bigger budget deficit than many of the euro zone's most indebted states, an auction of 30-year gilts produced the lowest ever cost of funds for that maturity.
The yield on 10-year gilts hit a record low of around 1.91 percent after the 2 billion 30-year sale, which drew bids for more than twice the amount on offer - much higher than at the last sale of the bond in March, and despite fears the Bank of England will call time on its bond-buying program.
Analysts said investors had offered above-market prices to secure their bids.
"Demand for perceived safe assets is exceptionally strong here," RBC strategist Sam Hill said. "For the time being the effect of (an end to) quantitative easing is comfortably being trumped by investors setting their objective of the return of their capital rather than (worrying about) what the rate of return on that capital is."
Buoyant demand at the auction also sent the gilt future to a new high of 117.98.
The Bank of England owns about one-third of all outstanding UK bonds following two rounds of purchases with new money, known as quantitative easing. Similar efforts by central banks to stimulate the economies of the United States and Japan have underpinned their bond prices, reinforcing investors' view of them as a safe-haven.
The yield on the benchmark 10-year U.S. Treasury stood near three-month lows at 1.82 percent on Wednesday, down from Tuesday's U.S. close despite a planned $24 billion sale of 10-year notes later in the day. Thirty-year yields also fell, nearing 3 percent, ahead of a $16 billion auction.
A sale on Tuesday of $32 billion in three-year notes meanwhile attracted the second highest bid-to-cover ratio in history, underlining the extent of demand for U.S. debt.
Demand for T-bonds has been fuelled partly by hopes that Europe's debt problems and an uncertain outlook for the world's biggest economy will prompt the Federal Reserve to undertake more monetary stimulus.
Yields on Japanese government bonds skidded to 19-month lows on Wednesday, with 10-year debt offering just 0.845 percent after a strong auction the previous day.
The 10-year JGB futures June contract closed near highs seen in February when the Bank of Japan surprised markets by announcing a fresh round of monetary easing.
"With stocks weakening and the yen strengthening, there are few investment choices for Japanese investors, so we keep buying JGBs,"said a fixed-income fund manager at a Japanese trust bank. "Even though our stomachs are full, we still have to keep eating."
Bond purchases by the Bank of Japan, which said in April it would buy a further 10 trillion yen of JGBs with up to three years until maturity as part of measures to stimulate the economy, have also fuelled price gains.
(Reporting by Lisa Twaronite in Tokyo and Emelia Sithole Matarise, William James, Michelle Martin and Fiona Shaikh in London. Editing by Jeremy Gaunt.)