Iceland successfully auctioned government bonds for the first time in three months on Wednesday, but had to accept a higher yield than in previous sales, reflecting concerns about the country’s overheating economy.

The government debt agency sold IKr1.5bn (€15.4m) of four-year bonds at an average yield of 9.8 per cent. It accepted bids in its monthly auction for the first time since January 18, when the 2010 bonds were sold to yield 8.1 per cent.

Wednesday’s auction attracted demand worth IKr8.1bn from 20 investors. Beat Siegenthaler, strategist at TD Securities, said: “There is clearly strong interest in Icelandic assets at these yield levels.”

Nerves about the economy have pushed Iceland’s borrowing costs sharply higher this year and the agency rejected prices offered by investors in the previous two auctions. “It’s expensive funding for the debt management office, but I think they wanted to make the point that there’s demand out there,” said Mr Siegenthaler.

Concerns about the economy could still be felt in the currency market, where the Icelandic krona fell to a fresh four-year low against the euro on Wednesday.

The krona dropped 2.7 per cent to IKr96.97 against the euro and 3 per cent to IKr78.64 against the dollar. The krona has slumped 30 per cent against the single currency since the start of the year amid concerns about the overheating economy. The volatility has prompted debate about whether the country should adopt the euro.

Iceland’s strong growth in recent years attracted huge inflows. Investors were attracted to the high yield on Iceland’s bonds and currency. But as rates have risen globally and concerns about Iceland have mounted, investors have started to sell Icelandic assets.

Data released on Wednesday showed a further increase in wages in March, putting further upward pressure on inflation. Rates have more than doubled in two years to 11.5 per cent, and the central bank has warned it is prepared to raise them further.

Mr Siegenthaler said the krona’s fall had addressed economic imbalances, but warned that trading would continue to be volatile.

“The main risk to Icelandic assets was the currency. It was overvalued, but now it isn’t,” he said. “Trading is still very momentum-driven, by active trading accounts. You don’t want to buy a currency that’s losing 2 per cent in a day. But when it calms down, a lot of people will find the yield levels very attractive.”

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