Germany's cost of borrowing over 10 years fell to a record low at an auction today as investors, worried about the euro zone rescue fund's effectiveness as a crisis-fighting tool, sought the safety of Berlin's debt.

The government sold €4.153 billion worth of Bunds for an average yield of 1.31 per cent, the lowest ever on record for the maturity. Investors bid for 1.5 times the volume of paper on offer.

The results underlined markets' lack of faith in measures agreed by European policymakers last month to combat the crisis, including help for Spain's ailing banks and allowing the ESM bailout fund to recapitalise banks and buy sovereign bonds.

Investors worry that Madrid may need a full state bailout, which would stretch the limits of the European Stability Mechanism and leave the region defenceless in case the crisis engulfs Italy, one of the largest bond markets in the world.

Prime minister Mario Monti yesterday said Italy could be interested in tapping the fund to ease its borrowing costs.

But even the future of the ESM as it stands is uncertain. Germany's constitutional court agreed yesterday to examine complaints against it but gave no date for its verdict, something that could block action for weeks if not months.

Bids covering the offer at the sale to the tune of 1.5 times compared with an average of 1.35 per cent at 10-year auctions this year, according to Reuters data.

The average yield at 10-year debt auctions this year has been 1.723 per cent.

Germany will repay bonds and interest worth €40 billion this week and the prospect of a further €50 billion of payments due next week from triple-A rated countries including France and the Netherlands also boosted demand.

Reuters