Investors are paying the European Financial Stability Facility for the privilege of financing Europe’s temporary rescue fund, with demand to buy its debt increasing even as yields drop below zero.
The facility auctioned 1.49 billion euros ($1.8 billion) of six-month bills at a yield of minus 0.0113 percent today, Germany’s Bundesbank, which acts as agent for the sales, said in a statement. Participants bid for 2.97 times the amount of debt allocated, compared to a so-called bid-to-cover ratio of 2.06 when the fund sold 182-day bills at a yield of 0.1421 percent on June 19. A negative yield on EFSF bills means investors who hold them to maturity will receive less than they paid to buy them.
“Investors are keen to snap up any kind of paper that can offer security and the EFSF, to some extent, has safe-haven status,” said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. “You can call it a paradox, but that’s the reality of the market.”
The EFSF joins Belgium, Denmark, France, Germany, the Netherlands and Switzerland in being able to attract investors to pay for the safety of holding their debt. Borrowing costs of Europe’s higher-rated nations have plunged since the European Central Bank cut its benchmark interest rate to 0.75 percent and lowered its deposit rate to zero on July 5.
The EFSF was set up in 2010 for three years to raise money in the debt markets to fund Europe’s rescue packages. It’s backed by guarantees from euro-area governments and has a total lending capacity of 440 billion euros, according to its website. Greece, Ireland and Portugal benefit from EFSF loans.
The EFSF has the top AAA credit grade from Moody’s Investors Service and Fitch Ratings and is rated AA+, the second-highest rank, by Standard & Poor’s.
“There is very significant demand for short-dated paper from the organization,” said Richard McGuire, a senior fixed-income strategist at Rabobank International in London. With an “uncertain backdrop” in Europe, “EFSF issuance backed by the tax-raising powers of the non-bailed out euro-zone countries is an attractive place to park your money, even if you have to pay a parking fee,” he said.