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LONDON (Reuters) - Germany's sold new two-year debt at a record low cost on Wednesday as investors nervous over Spain bought 4.2 billion euros of the low-risk bonds at auction.
The final re-opening of the March 2014 bond was sold at an average yield of 0.14 percent, falling below the 0.17 percent seen at a sale in January this year.
German yields have been driven to rock-bottom levels by demand for safe and liquid assets following a recent escalation of tension in the euro zone centred on Spain and doubts over whether it can restore health to its public finances.
"Investor demand for core paper remains firm with the background threat of crisis tensions ratcheting yet higher underpinning an overriding desire for capital preservation," said Rabobank strategist Richard McGuire.
Despite the low yields, the auction attracted bids worth 1.8 time the amount on offer to investors - in line with the average seen at previous sales of two-year debt this year.
German authorities retained 15.9 percent of the issue to be sold into secondary markets at a later date - an amount consistent with the 2012 average retention of 15.4 percent.
The sale was under scrutiny after the launch of a new 10-year German bond last week was deemed a 'technical failure' when bid fell short of the amount on offer and investors baulked at a record low 1.75 percent interest rate on the bond.
However, the strong two-year auction showed Berlin could still raise money at ultra-low cost and with relative ease thanks to its safe-haven status against the uncertain backdrop of the euro zone's long-running crisis.
In secondary markets two-year German bonds have changed hands at rates as low as 0.095 percent in the last two weeks as investors look for a safe place to park cash pulled out of riskier euro zone bonds.
Reporting by William James, editing by Nigel Stephenson