LONDON, Jan 10 (Reuters) – Euro zone banks cut their weekly borrowing from the European Central Bank by 20 billion euros on Tuesday, but the huge cash surplus providing life-support to the banking sector looks set to remain over the long term.

Banks’ need for short-term loans typically falls as the demand for cash to place on reserve at the ECB eases towards the end of a monthly cycle, but the decline has been accelerated by the central bank’s provision of more, longer-term loans.

This was reflected in falling demand for the ECB’s weekly funding injection. Borrowing fell to 110.9 billion euros, down from 130.6 billion euros last week.

Euro zone banks took up 489 billion euros late last month in the first of two opportunities to access the three-year loans - operations the ECB hopes will minimise the chances of them slashing lending in response to the region’s debt crisis.

Despite the decline in week-to-week funding, the amount of cash in excess of what the ECB estimates banks need was set to keep rising and remain high over at least the next year.

As a result overnight rates are anchored at rock-bottom levels and longer-term rates look likely to extend their falls.

“It’s definitely suppressive. It keeps short-dated rates subdued and that’s why you’re seeing the (German two-year) Schatz where it is, Euribor has been falling, Eonia remains subdued and will remain that way,” said Orlando Green, strategist at Credit Agricole in London.

LONDON, Jan 9 (Reuters) – Spanish government bond yields fell on Monday, reversing part of a sharp rise in borrowing costs last week, with traders citing an appetite to book short-term profits despite a negative outlook.

Spanish 10-year yields fell more than 15 basis points. Traders said investors bought the bonds to close out profitable short positions after a sharp rise in yields in the previous week. Spain and Italy are due to issue bonds this week.

Italian 10-year bond yields had also fallen earlier, but stabilised in late trade with the 10-year Italian/German government bond yield spread widening 3 basis point on the day to stand at 531 bps in late European trading.

“We wouldn’t be surprised to see a bit more cautiousness ahead of the auctions but on the other hand we are not seeing more selling pressure, which might be an indication that the necessary price concessions are more or less in the price already,” Rainer Guntermann, strategist at Commerzbank.

Bond prices typically fall ahead of an auction as dealers clear space on their books for the influx of new debt.

Spanish yields shed 15.5 bps to 5.6 percent, but 10-year Italian government bond yields remained above the psychologically important 7 percent level — above which funding costs are perceived to be unsustainable over the long-term.

Spain and Italy will be closely watched in the run-up to their first debt auctions of the year, with little sign investors have started 2012 any keener to buy the countries’ bonds than they were in 2011.

LONDON, Jan 9 (Reuters) – Spanish and Italian bond yields fell on Monday, reversing part of a sharp rise in borrowing costs last week, with traders citing an appetite to book short-term profits despite a negative outlook on both countries.

Italian and Spanish 10-year yields fell by 9 and 14 basis points respectively on the day. Traders said investors bought the bonds to close out profitable short positions after a sharp rise in yields the previous week.

“This doesn’t seem to be a move based on news flow… what we’ve seen this morning is some position squaring – a natural reaction to the heavy moves we’ve seen over the last week,” said Michael Leister, strategist at DZ Bank in Frankfurt.

The fall in Italian yields left the benchmark 10-year borrowing cost at 7.11 percent, above the 7 percent danger level that pushed Greece Ireland and Portugal into seeking external aid and still 50 bps higher than at the beginning of last week.

Spain and Italy will be closely watched in the run-up to their first debt auctions of the year, with little sign investors have started 2012 any keener to buy the countries’ bonds than they were in 2011.

“The main focus is still the Italian and Spanish supply. While we’ve got that lurking over us I think the market is likely to still be a little bit wary,” said Eric Wand, strategist at Lloyds Bank in London.

Markets had low expectations a meeting between German Chancellor Angela Merkel and French President Nicolas Sarkozy would ease concerns. The leaders will discuss the final details of a deal to increase fiscal coordination in the euro zone.

LONDON, Jan 9 (Reuters) – German Bund futures slipped on Monday, but with markets already looking nervously to debt sales from the region’s lower-rated sovereigns, falls were likely to be limited and investor appetite for risk low.

The key gauge of sentiment this week will be the performance of Spain and Italy in the run-up to their first debt auctions of the year, with little sign investors have started 2012 any keener to buy the countries’ bonds.

Yields on lower-rated euro zone debt were slightly lower in morning trade, but with Italian 10-year paper yielding 7.13 percent and the Spanish equivalent at 5.74 percent there was little let-up in the pressure on the region’s weaker states.

“The main focus is still the Italian and Spanish supply. While we’ve got that lurking over us I think the market is likely to still be a little bit wary,” said Eric Wand, strategist at Lloyds Bank in London.

Bund futures slipped 11 ticks in thin early trade to stand at 138.73, with better-than-expected export data from German temporarily lifting the investor gloom.

Despite the fall, Bunds were expected to outperform Spanish and Italian debt before the bond auctions on Thursday and Friday.

“The market seems to be in a pretty nervous state and so it will clearly be looking for a concession ahead of those auctions,” said Nick Stamenkovic, strategist at RIA Capital Markets in Edinburgh.

LONDON, Jan 6 (Reuters) – Efforts to address the euro zone debt crisis face their first major test of 2012 at Italian and Spanish bond auctions next week which will gauge the willingness of investors to plough more money into the region’s troubled sovereigns.

Both countries have an uphill struggle to convince investors they can raise enough money to pay back a mountain of maturing debt in 2012 with low growth, weak public finances and downgrade threats driving borrowing costs to unsustainable levels.

Spain will launch a new three-year bond alongside sales of two existing bonds while Italy is also expected to announce an auction of bonds maturing in 2015 and may add other lines.

The Italian and Spanish auctions will be the focus of a tightly packed supply schedule, which will also see sales next week from triple-A issuers Germany, Netherlands and Austria, expected to total more than 21 billion euros

“The market clearly doesn’t believe the last summit is a solution to the crisis. These bond will most likely get sold, but the real issue is the yield they have to pay to borrow the money,” said Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin.

After a torrid start to the year, Italian bond yields stand at more than 7 percent, above the level at which investors abandoned Greece, Portugal and Ireland, while Spanish yields are rising back towards that danger point after a series of grim budgetary projections.

“Even though the refinancing needs for Italy are actually more pronounced, we see Spain to be under more pressure given the persistent negative news flow and two auctions over the next two weeks,” said Norbert Aul, strategist at RBC Capital Markets in London.

LONDON, Jan 5 (Reuters) – Safe-haven German debt rallied on Thursday while bonds issued by almost all other euro zone sovereigns faced pressure as the scale of the region’s debt and economic problems took its toll on investor sentiment.

Spain and Italy, both facing debt auctions next week, were the hardest hit with benchmark bond yields rising by 15 to 20 basis points despite the European Central Bank buying bonds in the secondary market.

Elsewhere in the bloc, France found solid demand for its bonds at auction but Austrian debt suffered over exposures to Hungary while Greece’s debt woes threatened to boil over again.

“Markets are now reflecting the underlying sentiment and remain very nervous,” said Niels From, chief analyst at Nordea.

“There are several focal points. There is Spain with problems in the regions and the banks… there are still a lot of outstanding issues regarding Greece… and that’s only two of many.”

German Bund futures rose 70 ticks to 138.79 while benchmark Spanish yields were 18 basis points higher on the day at 5.66 percent

Spanish government bonds have underperformed their euro zone counterparts this week after the country’s economy minister said the public deficit for 2011 may be higher than the 8 percent of GDP forecast by the new government..

LONDON, Jan 4 (Reuters) – Euro zone banks locked in long-term dollar funding from the European Central Bank on Wednesday, underscoring the heavy dependence on official lending lines but shoring up refinancing needs for the near-term.

Although total dollar borrowing eased slightly after year end, banks opted for the security of having longer-term funding by preferring to replace short-term maturing loans with three-month cash.

Thirty four banks borrowed a total of 25.5 billion dollars at the ECB’s latest offering of three-month funding and 12 banks bid for 6.2 billion of seven-day loans. This replaced 33 billion dollars of maturing short-term loans and 1.4 billion borrowed in October.

“Banks seem to be looking for longer tenors in order to face the current situation and be less exposed to refinancing risks,” said Elwin de Groot, senior market economist at Rabobank.

The total amount of outstanding three-month dollar loans rose to 76.6 billion dollars after the tender from 52.4 billion.

The pattern mirrors a preference to secure funding on a long-term basis seen in euro markets, where banks borrowed nearly half a trillion euros in three-year loans in December.

Although longer-term borrowing reflects the current dislocations in the market, the liquidity boost has secured banks’ ability to refinance the large amount of debt repayments they face in the first quarter of the year.

LONDON, Jan 3 (Reuters) – Spanish government bond yields rose sharply on Tuesday as market participants cashed in Spanish bonds which they said was looking expensive compared to Italian debt.

Spanish debt has outperformed Italian paper on the perception that it poses less of a systemic risk to the currency bloc, and has less demanding refinancing needs in 2012. But a grim outlook for the country’s public finances was beginning to take a toll on that outperformance.

The spread between 10-year Italian yields and those of Spain tightened around 19 basis points this session to 161 bps after widening sharply in December.

“Spain is rich,” Padhraic Garvey, head of rate strategy at ING said. “I see Spain as vulnerable, so I am not surprised that it’s selling off and I would be long Italy versus Spain from here.”

Spanish 10-year government bond yields jumped 20 basis points to 5.33 percent, with one trader saying one quite large UK account had sold 10-year Spanish bonds.

“I have come across three or four accounts all of who agree Spain is looking very expensive versus Italy,” the trader added.

Spanish five-year government bond yields also jumped prompting the European Central Bank to intervene in that part of the curve, according to a second trader. Five-year yields last stood higher on the day at 4.47 percent.

LONDON, Jan 3 (Reuters) – German Bund futures slipped on Tuesday as December’s sharp rally faded, but the euro zone’s crippling debt crisis was expected to limit falls as refinancing pressure grows on the bloc’s lower-rated sovereigns.

The drop added to losses in the previous session, but underlying demand for the relative safety and liquidity of German debt was set to remain supportive as the region’s debt problems continue to fuel low-risk investment strategies.

Bund futures were 16 ticks lower at 138.03 after rallying more than 5 points in December to within sight of November’s record high of 139.58.

“The consolidation in Bunds following the turn of the year could still run another day,” Commerzbank strategists said in a note, but added that any falls were likely to be short-lived.

“Next week – at the latest – the focus should shift to the debt problems of the euro zone periphery again with the Italian and Spanish bond auctions scheduled.”

Italy’s borrowing costs, hovering near the 7 percent level, are a crucial gauge of sentiment with the country needing to refinance more than 100 billion euros of maturing bonds and interest payments in the first quarter of the year.

Italian 10-year bonds last yielded 6.90 percent, slightly lower on the day.

LONDON, Jan 2 (Reuters) – German government bonds fell on Monday, reversing some of the rally seen late in 2011, but with major markets centres closed trading was extremely thin and demand for Bunds was not expected to slow in the medium term.

Italian bonds outperformed in the quiet conditions with 10-year yields marked around 8 basis points lower at just below 7 percent.

The next few months will be critical for the euro zone with the debt crisis far from resolved and threatening to engulf Italy, which has around 100 billion euros of debt payments to meet in the first four months of the year, according to Reuters data.

“The debt crisis is still a massive obstacle for the whole of 2012,” said ING rate strategist Padhraic Garvey.

“For the next couple of weeks it may well feel okay although I think it will be a false sense of positivity and ultimately we’ll fall back to where we left off last year, which wasn’t a very pretty place.”

Bund futures fell 73 ticks to 138.31, having quickly retreated from an opening high of 139.32. Benchmark 10-year yields were 4.6 bps higher at 1.89 percent.

Nevertheless, the underlying demand for liquid and low-risk German paper remained largely intact after a year-end rally which saw Bund futures gain over 5 points in December.