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UPDATE 1-Investors pay to lend to Germany, want more from France
January 9, 2012 / 3:40 PM / in 6 years

UPDATE 1-Investors pay to lend to Germany, want more from France

* Germany sells 3.9 bln euros of 6-month bonds

* First money market auction to reach negative yield

* Debt agency changes bidding rules

* French yields rise

By Sarah Marsh

BERLIN, Jan 9 (Reuters) - Investors paid to lend Germany a combined 3.9 billion euros for six months on Monday, accepting a loss in a renewed flight to safety from the euro zone debt crisis.

France, by contrast, had to pay more to borrow short-term funds, albeit that demand for its bills was strong. Investors are increasingly focusing on a handful of euro zone economies, notably Germany and The Netherlands, to park their money.

While yields on the bonds of peripheral euro zone countries have hit record highs in recent months on concerns about the debt crisis, Germany’s yields have fallen to record lows.

On Monday they went negative for the first time at a regular auction, sliding to -0.0122 percent compared with a positive return of 0.001 percent at a similar auction in December.

Dutch bill yields also went negative last month, meaning that investors are actually losing money by buying the supposedly safe assets. Based on Reuters estimates, Berlin will earn 242,000 euros on the money it borrowed on Monday.

“In such uncertain times, return of money beats return on money,” said Unicredit analyst Kornelius Purps.

Demand at Monday’s auction was solid, with the sale drawing bids worth 1.8 times the amount on offer, Bundesbank data showed.

“It’s all part and parcel of this potentially dangerous environment where cash is being parked in Germany, and that’s deemed to be the safest place to have cash within the euro zone context at the moment,” said Padhraic Garvey, a strategist at ING in Amsterdam.

“It’s symptomatic of the environment we’re currently in where two-year paper is trading at pretty close to 15 basis points. Bills have traded negative and now for the first time they’ve come negative at actual auction.”

Still, the bid-to-cover ratio of demand was well down from December’s 3.8 in view of the low - or in this case negative - return.

Yields rose in France’s second Treasury bill sale of the year despite strong demand. It came on the heels of solid demand at the first French auction of long-term OAT bonds of 2012, where yields rose only slightly despite nervousness that France is on the brink of losing its triple-A credit rating.

The yield on the 26-week bill was 0.286 percent, after 0.074 percent previously.

The significance lies not so much in the rate as the rising spread between German and French yields.


Several recent German auctions have drawn fewer bids than the amount on offer, partly due to the extremely low yields. At a November auction of 10-year bonds that market players deemed “disastrous”, almost half of the paper was retained due to a shortage of bids.

Fears over the euro zone debt crisis have led commercial banks to stash their money at the European Central Bank rather than lend to each other recently. Overnight deposits at the ECB hit a new record of 464 billion euros, data showed on Monday, and traders said they could hit half a trillion euros by next week.

The German debt agency has changed the bidding rules for money market instruments this year to make investors bid by price rather than yield, making negative yields a possibility now, agency spokesman Joerg Mueller said.

“No one expected negative yields in this market segment in the long run, so our bidding rules also did not enable this (in the past,” Mueller told Reuters.

“Yet we saw negative yields for money market instruments in December on the secondary market. So we changed the bidding rules to bring them into line with those for the capital market segment, where it is usual to give bids at any price.”

The agency said the only previous auction to attract a negative yield was a five-year inflation-linked bond issued on Nov. 9 which drew a yield of -0.40 percent.

“On the one hand it is a friendly sign for the finance minister because he doesn’t have to pay a yield to the investor, but on the other hand it shows a very nervous market, as in the last year,” the debt agency’s Mueller said.

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