Greek Woes Underpin Demand for German Debt

(REUTERS) -- A German sale of 3.44 billion euros of two-year bonds saw strong demand on Wednesday as concerns over Greece led investors to stock up on safe-haven debt, while Portuguese treasury bills benefited from ample liquidity in the financial system.

Investors bidding for 2.2 times the amount of German bonds on offer despite the paper yielding just 0.17 percent on average at the auction. That was lower than the 0.29 percent yield at last month's auction.

After Germany was left unscathed by last week's mass rating downgrade by Standard & Poor's, the sale was better bid than December's, when the bid-to-cover was 1.4.

It is confirming that there is an interest in the safety of the German bonds no matter what the level of yield is, Alessandro Giansanti, rate strategist at ING said.

The fact that there is a lot of uncertainty first of all on what is going on with the debt exchange in Greece is fuelling safety bids.

Greece and its creditors meet on Wednesday in a renewed attempt to break a deadlock in talks to slash the country's debt and stave off a messy default.

The market showed little reaction to the bond sales.

At the other end of the credit spectrum, Portugal's 2.5 billion euro sale of treasury bills saw demand from domestic banks feeling flush with European Central Bank cash after December's nearly half a trillion euro offering of three-year loans.

Domestic banks are behind it, obviously. They can present a small (amount) of the bills as collateral with the ECB to raise money, Achilleas Georgolopoulos, rate strategist at Lloyds said.

The average yield on three-month bills was unchanged from the last auction at 4.346 percent, the average yield on 6-month bills fell to 4.740 percent and was 4.986 percent on 11-month bills. The last time Portugal issued 11-month bills was in April last year, just before it sought a 78-billion-euro bailout, when yields reached a record 5.9 percent.

S&P cut Portugal's rating by two notches to a junk status BB.

It's the first time they try to raise money with one-year bills since the bailout and the first auction after the downgrades to junk so it's more a positive rather than a negative result, Georgolopoulos added.

(Additional Reporting by Annika Breidthardt and Madeline Chambers, editing by Nigel Stephenson)

(This story corrects tenor of ECB loans in eighth paragraph)