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Germany's Borrowing Cost Ratchets Higher

Country Offers Yields of More Than 2% in Sign Investors Are Building Confidence in Euro Zone

Germany, purveyor of Europe's safest government bonds, saw its borrowing cost ratchet higher Wednesday, in a fresh sign that investors are building greater confidence in the euro zone's prospects.

The country had to offer yields of more than 2% at an auction of 10-year bonds, the highest level in nearly two years. As recently as April, it paid just 1.28%.

In the most troubled days of the euro-zone debt crisis, some of Germany's debt maturing over a shorter time horizon launched with a negative yield, meaning investors effectively paid it to be a guardian of their funds.

The euro crisis isn't over, and some countries, such as Italy, are still forced to pay up in order to borrow funds. But relatively upbeat growth, calmer euro-zone debt-market conditions and a decline in other key government bonds, such as those of the U.S., mean Germany's rock-bottom borrowing costs are ticking higher.

"The risk averse and growth bearish view of the world diverted a lot money and demand into Bunds in recent months and a lot of that is being recycled into more interesting investments now," said Kit Juckes, a macro strategist at Société Générale.

Underscoring the weaker demand for Germany's debt, Wednesday's Bund auction drew under €5.3 billion ($7.03 billion) in demand for just over €5 billion on offer—a relatively skinny cover.

The country's looming general election had little impact on the auction outcome, with polls suggesting incumbent Chancellor Angela Merkel is likely to head a new government.

U.S. Treasury debt, which is closely correlated to its German equivalent, has slid sharply since the U.S. Federal Reserve signaled in May that it is set to pull back on its stimulus measures. Yields on U.S. government debt with a 10-year maturity have climbed from 1.62% at the start of May to 2.92% in September. Yields rise as prices fall. This has dragged Bunds in the same direction in lock step.

Italy, dogged by its own political ructions and still mired in recession, was treated less favorably when it raised €8.5 billion short-term debt Wednesday.

The country paid an average yield of 1.34%—its highest 12-month funding cost so far this year—compared with 1.053% a month ago.

The biggest pressure on Italian bond yields came from its continuing political problems. For the first time since early 2012, Italian bond yields traded above their Spanish peers on Tuesday.

A committee charged with deciding whether to strip former Prime Minister Silvio Berlusconi of his Senate seat due to a tax-fraud conviction met late Tuesday but decided to postpone its vote due to procedural issues.

Some members of Mr. Berlusconi's center-right party say they will force the coalition government to collapse if politicians on the Senate committee authorize Mr. Berlusconi's removal from office.

The recent turbulence in Italian politics "isn't appreciated by [Italian debt] holders," said Newedge economist Annalisa Piazza.

Wednesday's higher financing costs for Italy bode ill for the launch of a new series of Italian three- and 15-year debt later in the week.

Write to Emese Bartha at

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