Greek risks boost demand at German bond sale

LONDON (Reuters) - Germany sold 4.3 billion euros (3.6 billion pounds) of new two-year bonds on Wednesday as concerns over Greece's ability to meet the terms of its latest bailout boosted demand for the safe-haven paper despite ultra-low returns.

The bonds carried a coupon of 0.25 percent coupon and dealers bid for 1.8 times the amount on offer, in line with the average since the start of 2011 although lower than at the last two-year sale in January.

"Another good German auction...the pricing is on the strong side," said Michael Leister, a rate strategist at DZ Bank.

"It is yet another indication that doubts remain and the market remains suspicious ... of a further deterioration of the debt crisis. It is not fully convinced that everything that has been agreed with regards to Greece is the final breakthrough."

Although German debt came under some early pressure on Tuesday after euro zone finance ministers agreed a further 130 billion euros of aid for Greece, it bounced back on Wednesday as markets focused on the implementation risks.

Ten-year yields, for example, held comfortably below 2 percent, which is the top of this year's trading range.

Greece must carry out a debt swap with its private investors and meet a host of requirements laid out by its international lenders and although an imminent default has probably been avoided, many analysts doubt the country can be put on a sustainable footing.

"It seems like the separation between investors continues, with some still searching for the safety of German paper, while others want Italian and Spanish debt," said Achilleas Georgolopoulos, a strategist at Lloyds Bank.

"Lots of the market is still worried about the macro and about the Greek situation."

The average yield at Wednesday's auction was 0.25 percent, compared with 0.17 percent at the last sale. By comparison, France sold six-month treasury bills on Monday at an average yield of 0.23 percent.

The good result came as German debt also rallied on below-forecast economic data showing the euro zone's service sector unexpectedly contracted this month, reviving fears of recession.

German Bund futures were last 37 ticks higher at 138.33, with two-year yields all but flat at 0.26 percent and 10-year yields 3.6 basis points lower at 1.94 percent.

(Reporting by Kirsten Donovan, editing by Nigel Stephenson)