A disastrous sale of German benchmark bonds sparked fears on Wednesday the debt crisis was beginning to threaten even Berlin, with the Bundesbank forced to dig deep into its pockets to ensure the auction did not fail.
In one of the least successful debt sales by Europe's powerhouse economy since the launch of the single currency, the low returns offered -- just 2 percent annually over 10 years -- deterred investors made uneasy by the escalating cost of the crisis to Germany.
That meant the central bank had to pick up 39 percent of the 6 billion euros of debt Germany had hoped to sell after commercial banks bought just 3.644 billion euros of the issue.
It is a complete and utter disaster, said Marc Ostwald, strategist at Monument Securities in London.
This does not bode well, it is the worst of uncovered auctions that we've had this year and little wonder that the Bund sold off on the back of it.
The country's debt agency said the shortfall in the sale reflected worsening market nerves, that it would sell back the retained amount to investors on secondary debt markets and that Germany would not face a funding bottleneck.
Bund futures, the euro and European stocks fell after the auction, with Germany's 10-year debt costs rising above equivalent U.S. yields for the first time since early October.
The results compared with an average retention rate by the Bundesbank of 17.83 percent at 10-year bond auctions in 2011. Data from IFR, a Thomson Reuters service, showed this to be the highest Bundesbank retention since at least July 1999.
German yields have been forced down to record lows by demand from investors seeking shelter from the debt crisis that has ensnared Italy and Spain and now threatens to drag down other, higher-rated countries such as France and Belgium.
The new bond promised to pay out a 2.0 percent interest rate -- the lowest ever on an issue of German 10-year Bunds. The average yield at the auction was 1.98 percent, down from 2.09 percent at the last sale of the previous benchmark in October.
The weak auction demonstrates that some are now beginning to think twice about whether such low yields are appealing given the threat that Germany has to begin diluting its credibility by underwriting the debt of the euro zone's struggling states.
Bunds are starting to lose their appeal because markets have to believe the euro bonds story and Germany is very close to starting, essentially, to guarantee the debt of other countries, said Achilleas Georgolopoulos, strategist at Lloyds Bank in London.
A possible path towards a common euro zone bond -- which Germany opposes at it would raise the country's cost of borrowing -- is being laid out by the European Commission, which is unveiling proposals for tighter budget controls over euro zone countries' budgets later on Friday.
(Graphic by Scott Barber; Editing by John Stonestreet)