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FRANKFURT, Germany (AP) — Investors have bought billions of euros in German treasury notes that pay negative interest — meaning the purchasers agreed to pay a small fee for the privilege of lending the German government their money.
The negative yield is a sign of the stresses in the 18-country eurozone, where the economy is struggling to maintain a weak recovery.
Germany auctioned 3.34 billion euros ($4.3 billion) Wednesday in two-year notes at an average yield of minus 0.07 percent.
Rates are very low all over, and German debt is considered ultra-safe, so security-minded investors are paying for safety. Expectation the European Central Bank will buy bonds has also driven down yields, which move opposite to prices. And the small negative yield on the notes is still a better alternative than the minus 0.2 percent that the ECB charges banks deposit money with it.
The European Central Bank has slashed its interest rate benchmarks in an attempt to spur growth and lift inflation. Its refinancing rate charged to banks for credit is at a record low 0.05 percent. Beyond that, it has said it will purchase bonds backed by bank loans, and is considering even larger-scale purchases of government bonds. Both would pump newly-created money into the economy, a step aimed at lowering interest rates even more and getting credit flowing to companies.
The threat faced by the ECB is anemic growth — the eurozone didn't grow at all in the second quarter — compounded by alarmingly low rates of inflation. The current rate of an annual 0.4 percent is well below its goal of just under 2 percent.
Low inflation has raised fears of outright deflation or falling prices. Higher bond prices, and lower yields, could reflect increased expectations of deflation, since bond holders would be repaid in currency that is worth more.
Deflation can be poison for the overall economy, however, if it leads consumers to postpone purchases in the expectation that prices will fall even further.
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