Lower costs of borrowing give Europe brief respite

Both countries saw their borrowing costs dip at the auctions, in a further sign that investors may have temporarily put some of their concerns over Europe's debt crisis to one side at the start of the new year. Italy and the Netherlands have also managed to sell their debt over the past week or so in a fairly trouble-free manner.

Germany, the biggest contributor in Europe's bailouts, managed to sell 4.06 billion euros (US$5.3 billion) in its benchmark ten-year bonds at an average yield of 1.93 percent. That was down on the previous 1.98 percent it had to pay.

Meanwhile, Portugal, which was bailed out last April after being locked out of international markets, paid a markedly lower interest rate to borrow 1 billion euros (US$1.3 billion) in three-month treasury bills. The rate fell to an eight-month low of 4.346 percent and was sharply down from the 4.873 percent rate it had to pay in a similar auction last month. Though Portugal cannot tap long-term bond markets at a reasonable price, it has sought to maintain a market presence by issuing shorter-term debt.

Analysts said the improvement may represent a sign that Portugal is regaining the markets' confidence as it carries out spending cuts and revenue increases in return for its 78-billion-euro (US$102 billion) bailout.

“There's been an improvement in the risk perception of Portuguese debt, which has driven rates down” said Filipe Silva, debt manager at Portuguese financial group Banco Carregosa. “Now we just need to see whether it holds.”

Though better than November's auction, which raised fears that Europe's debt crisis was spiraling out of control, there was some concern voiced over the amount of German bunds investors actually wanted.

Bids for 5.14-billion-euro (US$6.7 billion) worth of bonds exceeded the full amount on offer of 5 billion euros (US$6.5 billion), but only barely, counting the 943 million euro the government kept back for secondary market operations.

“Yes, it was covered, so that's a relief,” said Marc Ostwald, a markets strategist at Monument Securities. “On the other hand, the coverage was poor.”

Ostwald said the low interest rate offered little attraction to typical buyers such as annuity and insurance companies, as it was too small to cover their obligations. Meanwhile, investors seeking only a safe haven were more likely to want much shorter-term issues.

“Clearly, it wasn't the best cover, but you wouldn't expect it to be,” he said.

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