Germany Sells Debt at Historic Lows

18.01.2012 13:45

WSJ: Germany paid the lowest interest rate on record to sell two-year treasury notes Wednesday, drawing strong demand after the recent downgrade of France and Austria boosted the safe haven appeal of the country's debt.

Portugal's borrowing costs also remained contained at its treasury bill auction, shrugging off its ratings downgrade late last week.

Germany sold €3.44 billion ($4.36 billion) of the December 2013-dated paper at an average yield of 0.17%, down from 0.29% at the previous auction Dec. 14. That too was a record.

The debt agency received bids worth €7.60 billion for the €4 billion on offer, for a bid-to-cover ratio of 2.2 on the amount sold.

"The result comes notwithstanding the low levels of yields at 0.17%," said Alessandro Giansanti, senior rates strategist at ING Bank.

"From this auction, we can see that risk aversion in the euro sovereign market together with expectations for [the] European Central Bank reducing official rates plays in favor of Germany, which can borrow money at beneficial levels."

Last week, Germany's five-year bond auction drew massive bids of close to €9 billion. Earlier this month, the country sold six-month treasury bills at a negative yield. It was the first auction with a negative yield, meaning investors were effectively willing to pay the country for the privilege of lending to it.

Newedge economist Annalisa Piazza said Wednesday's auction was well-received, "despite two-year yields at record low levels."

German two-year yields hardly budged in trading after the auction, maintaining the trend from a steady open. The two-year bond was yielding 1.74%, unchanged from the close Wednesday.

While the yield on the two-year paper is "certainly nothing for pick-up hunters," it reflects both the European Central Bank's liquidity policy and investors' preference for short-end paper, said Christoph Rieger, head of interest rate strategy at Commerzbank.

German auctions raised eyebrows late last year, with some investors deterred by the relatively large amounts on offer coupled with historically low yields. There were also fears the triple-A-rated country could eventually lose its top rating as the continent's debt crisis engulfs core issuers.

Standard & Poor's stripped France and Austria of their coveted triple-A ratings last week. Malta, Slovakia and Slovenia were also downgraded by one notch. S&P lowered the ratings of Italy, Spain, Cyprus and Portugal by two notches, to double-B from triple-B minus with a negative outlook.

Still, despite the downgrade, Portugal's debt agency sold the maximum targeted €2.5 billion in three-, six- and 11-month treasury bills Wednesday, receiving total bids of €6.935 billion, implying a near three-fold coverage of the total amount sold.

The country's borrowing costs came in at or below previous auction levels. The average yield on the three-month paper was set at 4.346%, unchanged from the previous auction Jan. 4. The average yield on the six-month T-bills was set at 4.740%, down from 5.250% at the previous sale of similar paper on Nov. 16. The average yield on the 11-month paper was 4.986%.

Secondary market levels in Portuguese debt remained calm Wednesday after the recent bout of weakness following the S&P downgrade.

Portugal's government has committed to implementing the bailout program but the worsening global economic outlook and a deeper domestic recession could damper the plan. Under it, Portugal would be able to return to markets for financing next year, something economists increasingly doubt.

—Art Patnaude in London contributed to this article.
Write to Emese Bartha