(Adds quote, updates prices) By John Geddie LONDON, April 1 (Reuters) - Germany sold five-year debt at a record low yield on Wednesday, while its longer-term borrowing costs also fell to near historic troughs, as some investors bet ECB buying would outweigh hints of a rebound in the euro zone economy.
Analysts said that even with signs that growth and inflation were picking up across the bloc, which should have an upward pressure on yields, investors were focused on the scale of the ECB's trillion euro quantitative easing programme.
ECB purchases of German bonds are estimated to be over 11 billion euros a month, but the universe of bonds eligible for it to buy is shrinking as yields fall below the central bank's lower limit of -0.20 percent. http://link.reuters.com/gak34w "The battle between these two forces is going to play out over the next few months," said RBC strategist Peter Schaffrik.
"I think ultimately the economy wins and yields are going up, but in relative terms Bunds are going to stay rich versus other measures." In the latest sign of green shoots in the euro zone economy, manufacturing activity across the bloc accelerated faster than previously thought last month, a business survey showed on Wednesday.
A slump in consumer prices may also have bottomed out, and could start rising again soon.
Yet Germany managed to offload around 3.4 billion euros of bonds maturing in April 2020 at an average yield of -0.10 percent on Wednesday.
All German bonds out to seven years now have negative yields, effectively meaning investors are paying for the privilege of lending to the country.
In secondary markets, German 10-year yields fell 1 basis point to 0.17 percent, just above their record low of 0.165 percent.
While the ECB cannot buy bonds at auction, or those of a similar maturity, analysts said the scale of the central bank's QE scheme gave them certainty of a future buyer.
"Investors know that the ECB has to buy a lot of German bonds, so they can be certain they can sell these on," said KBC strategist Piet Lammens.
With the ECB purchases per country determined by the size of economies or so-called 'capital key', it is expected to buy roughly 23 percent of Germany's total debt stock - more than any other country. http://link.reuters.com/zem24w But with yields falling, it is becoming an ever smaller pond in which the ECB can fish.
Commerzbank has calculated that 14 percent of German bonds with maturities above two years have yields below -0.20 percent, the ECB's deposit rate which marks the lower limit for its purchases.