GERMANY SOLD €4.56 billion of bonds carrying a 0 per cent coupon yesterday, its first sale of debt offering investors no regular return and underscoring its safe-haven appeal at a time of turmoil in the euro currency zone.
Germany joins a select band of countries, including Japan, by issuing conventional debt carrying little or no coupon payment. It attracted strong demand for the two-year bonds, whose sale completes almost half of its 2012 funding target.
“As long as the Greek/euro zone crisis continues, people have to get used to the fact you’ll have these very low or even negative yields on shorter-dated paper,” said Peter Allwright, head of absolute return on rates and currency at RWC Partners.
“Even if you assign a small probability to a euro zone break-up, the consequences are so large that it makes having that insurance worthwhile.”
Pricing the bond just below face value gave an average yield of just 0.07 per cent – almost free money for the biggest economy in the euro zone. But that did not deter buyers concerned that a new Greek government will reject the terms of the country’s bailout, possibly forcing it to ditch the euro and throwing the currency zone into a fresh crisis.
As a result of the turbulence, investors have become more concerned with preserving their capital rather than worrying about returns. This has pushed German bond yields to record lows, in contrast with Spanish and Italian yields which have marched higher as international investors ditch their debt.
To put the 0 per cent into perspective, on a €13.5 billion January 2014 bond, paying a 4.25 per cent coupon, Spain has annual payments of almost €600 million.
Yields on benchmark two-year Spanish and Italian bonds, which reflect borrowing costs, are 4.17 per cent and 3.59 per cent respectively, while France paid investors a yield of 0.74 per cent at a two-year bond sale last week.
Although Japan has offered two-year bonds with a coupon of just a few basis points throughout much of the last decade, that has reflected prevailing interest rates, whereas the 0 per cent coupon on the German bonds shows the strength of demand for the paper.
Germany will sell more of the 2014 paper over the next few months and average yields could fall further if the crisis intensifies. Its previous two-year benchmark eventually totalled €15 billion. – (Reuters)
