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German 30-year Bund auction to test demand for sub-zero yields

By Dhara Ranasinghe

LONDON (Reuters) - Germany's borrowing costs edged higher on Wednesday before the sale of new 30-year government bonds that could test investor demand for deeply negative bond yields.

Germany, the euro zone's benchmark bond issuer, plans to sell 2 billion euros of the new bond, with a 0% coupon.

Analysts say the 30-year bond will probably be the first issued with a negative yield. Thirty-year bonds sold in July yielded an average 0.3%.

Thirty-year bonds across major markets have tumbled this year as worries about weak growth and speculation about central bank easing drives investors into longer and longer-dated maturities to grab a few extra basis points of yield.

"The new 30-year bond being auctioned by Germany will be positioned as a test of investor demand for yields at these low levels," said Peter McCallum, a rate strategist at Mizuho.

"This launch may be one in which the auction is soft but the weakness is relatively short-lived. We suspect some will be looking to buy the bond but only after the supply has cheapened the sector further."

Investors typically sell existing bonds before an auction to make way for new supply, and long-dated German bonds underperformed their shorter-dated peers in early trade.

The 30-year German bond yield rose 2.5 basis points to -0.15% , above last week's record-low -0.31%.

Below 0%, investors are essentially paying governments to hold their debt -- a move that can be profitable if investors are willing later on to pay more for holding government debt.

In the past year, German 30-year bonds have returned over 30%, compared with returns of around 10% on 10-year Bunds. This comes as the pool of negative-yielding bonds deepens globally.

Returns on 30-year government bonds, Germany -

Tuesday's auction also takes place amid increasing clamor in Germany to ramp up spending to boost a frail economy.

"The appetite for that (30-year bond)could well determine whether the German government is minded to raise further money that way in the coming months," said Michael Hewson, chief market analyst at CMC Markets.

Most euro zone bond yields were higher, with focus turning to the release later in the day of minutes from the U.S. Federal Reserve's last meeting.

Italian bond yields steadied after falling on Tuesday on hopes that early elections could be averted.

Italian President Sergio Mattarella begins two days of talks with parties on Wednesday to seek a way out of a political crisis that will lead to formation of the country's 67th government since World War Two or early elections.

(Reporting by Dhara Ranasinghe, editing by Larry King)

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