Germany's cost of borrowing over 10 years fell to a record low at an auction on Wednesday as investors, worried about the euro zone rescue fund's effectiveness as a crisis-fighting tool, sought the safety of Berlin's debt despite negligible returns.
The government sold €4.153-billion ($5-billion U.S.) worth of Bunds for an average yield of 1.31 per cent, the lowest ever on record for the maturity. Investors bid for 1.5 times the volume of paper on offer.
The results underlined markets' lack of faith in measures agreed by European policy makers last month to combat the crisis, including help for Spain's ailing banks and allowing the ESM bailout fund to recapitalize banks and buy sovereign bonds.
Investors worry that Madrid may need a full state bailout, which would stretch the limits of the European Stability Mechanism and leave the bloc defenceless in case the crisis engulfs Italy, one of the largest bond markets in the world.
Prime Minister Mario Monti on Tuesday said Italy could be interested in tapping the fund to ease its borrowing costs.
But even the future of the ESM as it stands is uncertain. Germany's constitutional court agreed on Tuesday to examine complaints against it but gave no date for its verdict, something that could block action for weeks if not months.
"We're very far from a lasting solution to the euro debt crisis," said Investec's fixed income analyst Elisabeth Afseth. "There's not much to be gained in holding German Bunds but it's more of a capital preservation thing."
Bids covering the offer at the sale to the tune of 1.5 times compared with an average of 1.35 per cent at 10-year auctions this year, according to Reuters data. The average yield at 10-year debt auctions this year has been 1.723 per cent.
Germany will repay bonds and interest worth €40-billion this week and the prospect of a further €50-billion of payments due next week from triple-A rated countries including France and the Netherlands also boosted demand.
For shorter-dated debt, investors are even willing to pay Germany to park their cash with it. Two-year yields traded in and out of negative territory this week.
In secondary markets, where investors trade the issued debt, 10-year yields stood at 1.31 per cent, near a one-month low of 1.299 per cent hit on Friday.
They are not far away from a record low of 1.127 per cent hit on June 1, when fears over a euro zone breakup were at their peak before a Greek election that anti-austerity politicians were seen having a chance of winning. The vote was narrowly won by pro-bailout politicians, but broad concerns around the future of the whole euro project remain.