February 6, 2013 / 11:21 AM / 5 years ago

UPDATE 1-German five-year bond sale draws strong demand

* Germany sells 3.27 billion euros of five-year bonds

* Demand reinforced by recent sharp rise in yields

* Euro zone worries add to caution, support demand

By William James

LONDON, Feb 6 (Reuters) - Germany sold 3.27 billion euros of five-year bonds on Wednesday, drawing strong demand from bidders with a preference for low-risk assets and attracted by a recent sharp rise in yields.

The bonds sold at a yield of 0.68 percent, some 15 basis points higher than when the issue was launched in early January, thanks to a broad selloff in German debt caused by rising money market rates and receding fears over the euro zone debt crisis.

Nevertheless, analysts said demand for the paper was strong after the rise in yields had made the paper more attractive and a re-emergence of political risks in the region’s periphery had turned some investors more cautious.

“It seems very positive. They got huge demand helped by the sell-off that we’ve seen recently in Germany, especially in the five-year sector,” said Alessandro Giansanti, strategist at ING.

“There is also some tension (in the market) ... political risk in Italy and Spain is driving money out of the periphery into core assets and this could be another factor supporting the auction.”

Bids for the bonds were worth 1.9 times the amount allocated — higher than at the bond’s previous sale and stronger than the average across the past five sales of equivalent German debt.

Five-year German yields have more than doubled this year as investors sold low-yielding but safe bonds they had bought to hedge against an escalation of the euro zone crisis and put the money into assets with higher returns.

Larger than expected repayments of the European Central Bank’s long-term banking loans in late January also hit shorter-dated German debt as investors priced in a steeper rise in money market rates over the coming year.

But the safety and liquidity of German debt remain attractive for risk-averse investors spooked this week by a corruption scandal in Spain and uncertainty over an Italian election due later this month.

“Does it offer great value at 0.68 (percent)? To some extent, yes,” said Marc Ostwald, strategist at Monument Securities in London.

“If you are worried now that markets are perhaps waking up to some of the realities that euro zone risks have not suddenly evaporated... then probably you want to be looking at the safe-havens on a back-up in yield.”

Analysts said auctions of five-year German paper were typically supported by central banks who prefer short-maturity holdings and real money funds who need to match investment benchmarks.

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