Investors Pay to Lend Germany Money

Investors Pay to Lend Germany Money

Investors are paying for the privilege to lend Germany money as they look for a haven from the financial and economic crisis hitting the rest of Europe.

Germany auctioned (EURO)5 billion ($6.14 billion) in two-year treasury notes Wednesday with an average interest rate, or yield, of minus 0.06 percent.

A willingness among investors to sacrifice returns for safety highlights how fearful financial markets are at the moment.

Investors see Germany’s bonds as a haven from the turmoil over too much debt in some of the 17 countries that use the euro as their currency. Germany can easily pay its debts _ the country’s economy is growing and its government finances are in relatively good shape.

Demand for such safe investments is strong because bonds of other governments are no longer seen as risk-free. Spain and Italy are struggling to borrow money at affordable rates, and Greece, Ireland and Portugal have needed bailout loans from the other countries.

Interest rates on safe investments are very low. The yield on two-year U.S. Treasury bills was only 0.225 percent Wednesday. The ECB’s super-safe overnight deposit facility now pays banks zero interest, after the ECB cut the rate July 5 from 0.25 percent in an effort to get banks to lend. German notes have already traded with negative yields in the secondary market.

The notes were sold Wednesday to 32 banks that can then either keep the bonds or sell them on to other investors. The negative yield applies if the bonds are held to maturity; since there’s an active secondary market, the yield could rise or fall with the price on that market. Bond yields and prices move in opposite directions.