Bloomberg News

Germany to Borrow for Free at Two-Year Sale Amid Crisis

May 22, 2012

The German national flag flies in front of the Reichstag, German's parliament building, in Berlin. Photographer: Michele Tantussi/Bloomberg

The German national flag flies in front of the Reichstag, German's parliament building, in Berlin. Photographer: Michele Tantussi/Bloomberg

Germany will borrow for free at a sale of two-year government notes tomorrow, betting it can lure buyers seeking a haven from the European debt crisis.

Germany, the only country in the euro area with a stable outlook on its AAA rating, will sell as much as 5 billion euros ($6.4 billion) of two-year notes carrying a zero-percent coupon, a record low, Bundesbank data showed today. That’s down from a fixed interest payment of 0.25 percent at the previous sale of similar-maturity notes on April 18.

“This reflects extreme risk aversion in the market,” said Marchel Alexandrovich, a senior economist at Jefferies Group Inc., one of 39 institutions that deal directly with Germany’s debt agency. “While investors await a clearer picture of where the euro project is heading, the main investment criteria in this region is to get your money back rather than making a profit. That’s why Germany can borrow at these rates.”

German borrowing costs have plunged to the lowest on record amid mounting concern that Greece will exit the currency area following an inconclusive election on May 6. Yields on German two-, five-, 10- and 30-year securities slid to records at the end of last week after Moody’s Investors Service lowered the credit ratings of 16 Spanish banks.

EU Meeting

The yield on Germany’s two-year note climbed almost two basis points to 0.06 percent at 2:17 p.m. London time, having tumbled to 0.031 percent on May 18. The yield on Spain’s two- year security dropped 15 basis points today to 4.06 percent. Two-year U.K. gilts yield 0.31 percent, with similar-maturity U.S. Treasury notes at 0.30 percent.

The note sale will take place on the same day European Union leaders meet in Brussels to discuss how to revive growth and grapple with a political impasse in Greece.

Bonds issued by Germany, the region’s largest economy, returned 1.6 percent this month, compared with a 0.9 percent gain for French debt and a 1.2 percent loss from Italian securities, according to indexes by Bloomberg and the European Federation of Financial Analysts Societies. Spanish bonds lost 2.7 percent, the indexes showed.

Greek Recession

“Investors are willing to pay a safe-haven premium to hold our bonds, and that explains some of the historically low yields,” Carl Heinz Daube, managing director of Germany’s Federal Finance Agency in Frankfurt, said in an e-mailed response to questions. “Investors are searching for German bonds because of what our government did. Germany is showing some economic strength, good tax revenues and lower benefit spending.”

The average yield on German bonds dropped to 1.43 percent on May 17, the lowest since at least 1992, according to Bloomberg and EFFAS indexes. A post-Greek-election poll of 1,253 Bloomberg subscribers found 57 percent expect at least one country to leave to monetary union this year.

Greece is in the fifth year of a recession that has been amplified by austerity measures linked to its international aid, with the unemployment rate reaching 21.7 percent in February. A caretaker government was sworn in last week to lead the country to new elections on June 17 after an inconclusive poll on May 6 propelled the Syriza party, which wants to annul the bailout, into second place.

“Tomorrow will be a historical event,” said Peter Chatwell, a fixed-income strategist at Credit Agricole SA in London. “The euro is at a crossroads, and we are in the tensest period of the crisis that we have seen yet. Against that backdrop, investors’ sentiment of return of capital rather than return on capital prevails.”

To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Emma Charlton in London at echarlton1@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net


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