Investors Pay to Lend Germany Money

Average yield on the new Schatz line came in at minus 0.02%

By EMESE BARTHA And GEOFFREY T. SMITH

Nervous investors Wednesday paid Germany for the privilege of parking their funds at a bond sale for the first time since July as renewed concerns over Greek finances stoked an appetite for the euro zone's safest securities.

Investors are flocking back to German debt as Greece's problems intensify and the positive impact of the European Central Bank's bond-buy pledge starts to fade. The auction results underscore how the floundering talks among Greece's creditors are damaging confidence: Investors are so scared that troubles in Greece will infect other countries with shaky finances that they are paying more for two-year German bonds than they will get back when these bonds mature.

But while a sharp decline in Germany's borrowing costs will help the country's finances, plummeting bond yields could sow the seeds of future financial system instability, the Deutsche Bundesbank said Wednesday.

In its annual Financial Stability Report, the German central bank said that the sovereign debt crisis remained the largest immediate threat to the system, due to "the many channels of transmission and contagion in a closely interconnected economic and monetary area."

"With the Bank [ECB] yet to purchase any bonds and worries about Greece escalating again, investors seem to be losing what little faith they had regained," said Jennifer McKeown, senior European economist at Capital Economics.

At Wednesday's auction, Germany sold €4.323 billion ($5.49 billion) of a new series of Treasury notes, or Schatz, the Bundesbank said.

The average yield on the new Schatz line came in at minus 0.02%, while the Finance Agency's €5 billion offer attracted €8.422 billion in bids. This is the first negative yield at a two-year German debt auction since July 18, when the then auctioned June 2014-dated Schatz was sold at an average yield of minus 0.06%. At the previous auction held on Oct. 17 for the September 2014-dated Schatz, the average yield was 0.07%.

One of the most visible effects in Germany of the euro zone's financial crisis has been the collapse in bond yields, as investors have fled riskier euro assets and sought safety at any price in the German bond market. That has driven yields on savings products up to two years and longer and down to zero or even below at times, with negative effects for millions of German savers.

The plunge in German borrowing costs mirrors a trend witnessed earlier in the year when concerns over the ability of the Spanish government to raise funds from the market sparked panic in the market and pulled yields on short-dated German debt below zero. The ECB's pledge to buy bonds of the euro zone countries with shaky finances as long as these countries agree to a monitored program of cost cutting has helped Spanish and Italian bonds recover. That has put Greece firmly in the market's cross hairs.

Although cash-strapped Greece on Tuesday raised the money it needs to avoid default when Treasury bills mature this Friday, the ECB's reluctance to provide additional money to Greek banks poses a risk to the government, which, in order to keep afloat, has depended on support from local banks to sell its debt.

Other factors have also boosted the appeal of German debt. Growth in Germany, the euro zone's largest economy is slowing as demand for its exports cools. That raises the possibility of another round of interest-rate cuts by the European Central Bank.

Growing fears that U.S. political leaders may not be able to bury their differences in time to avoid steep spending cuts and tax increases are also keeping market participants anxious.