Germany sells debt at 0% coupon


Germany sold €4.56 billion of bonds carrying a zero per cent coupon today, its first-ever 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 - which joins a select band of counties including Japan which have issued conventional debt carrying little or no coupon payment - attracted strong demand for the two-year bonds, whose sale completes nearly half of its 2012 funding target.

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.

The zero per cent coupon did not deter buyers concerned 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. That 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.

"This is Germany's first zero-coupon two-year issue which, in itself, clearly reflects the now familiar crisis-induced trend of investors favouring a return of their money over a return on their money," said Rabobank rate strategist Richard McGuire.

"Today's positive (auction) results firmly endorse this and... even at these historically low levels, Bund yields have further room to the downside ... as Greek and Spanish-related tensions continue to build," McGuire said.

Credit Agricole rate strategist Peter Chatwell said: "(It) was a strong auction, with some overbidding which is not always the case in German auctions, so clearly there were some investors who see value in the Schatz at a near-zero yield."

European leaders will try and breathe life into their stricken economies at a summit later today, but disagreement over the issue of common euro-zone bonds to mutualise the region's debt may dominate the meeting and do little to reassure markets politicians are on top of the situation.

German bonds rallied in the secondary market after the sale, with two-year yields falling to 0.04 per cent, while 10-year yields were 6 basis points lower on the day at 1.415 per cent.

The EU powerhouse economy's ultra-low borrowing cost is in stark contrast to the rising costs in countries engulfed in the euro zone debt crisis. For example, 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.

Moreover, with German government bond yields falling through the last year to record lows, and with euro-zone inflation at an annual rate of 2.6 per cent last month, investors are losing money in real terms.

Bids at Germany's two-year bond sale were worth 1.7 times the amount sold, in line with the average at similar auctions this year. Similarly, the average yield of 0.07 per cent compared with 0.20 per cent.