One day after Moody's lowered its outlook for Germany's credit rating, the nation sold 2.32 billion euros worth of ultra long-term bonds.
The average yield at Wednesday's auction of 30-year bunds was 2.17%, down from 2.41% at the last such auction in April. The drop in yield, which falls when prices rise, suggests that demand remains strong. However, the amount sold was below the 3 billion euros offered by the German Finance Agency.
The sale came a day after Moody's changed its outlook on Germany's prized Aaa credit rating to "negative" from "stable."
While the move raises the threat of an official credit downgrade, investors appear to be taking Moody's warning with a hefty grain of salt, at least for the time being.
In a sign of the continued demand for bunds as a safe-haven, Germany also sold 752 million euros worth of 10-year inflation-linked bonds at a negative yield of 0.4%. That means investors were effectively paying the government to take their money.
Moody's decision to lower its outlook for Germany, along with the Netherlands and Luxembourg, was a "one-off factor," according to note from rates strategists at Societe Generale. However, the strategists also supported the rationale behind Moody's decision.
That is, Germany is facing the mother of all Catch-22s.
As the largest economy in the region, Germany could end up assuming the liabilities of its fellow euro area nations if the currency union moves toward some form of debt "mutualization." At the same time, German banks are heavily exposed to the debts of troubled governments on the periphery of the union and an outright collapse would certainly take a toll on the nation's economy.
Even if Germany's top-tier credit rating is tarnished, it may not make much of a difference. After the United States lost its AAA rating last year, yields on U.S. Treasuries continued to fall as investors still view American debt as a safe bet.
In the secondary market, where investors buy and sell bonds, yields on Germany's 10-year bonds ticked higher Wednesday but remained exceptionally low at 1.26%. Meanwhile, yields on Germany's 2-year notes were a negative 0.6%.
As long as Spain and Italy are in the line of fire, investors will probably still flock to German bonds for safety. As bond guru Bill Gross is fond of saying, Germany has "the cleanest dirty shirt" in Europe.
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