LONDON, Dec 29 (Reuters) – Lacklustre demand for Italian debt at auction put bond investors in a risk averse mood on Thursday, prompting the ECB to step in and buy Italy’s bonds in an effort to slow rising yields.

Italy sold a total of 7 billion euros of bonds, tapping the current 10-year benchmark at a yield just under 7 percent – lower than at the previous sale but still hard for Italy to sustain given the 450 billion euros ($580 billion) that it needs to raise through debt issuance in 2012.

“It is slightly positive that they were able to issue the full amount in the 10-year and we have started to see some reduction in yield … but 7 percent is still a very weak (result),” said ING rate strategist Alessandro Giansanti.

Traders said the ECB was active in the secondary market after the auction, buying small amounts of Italian debt and checking for prices on Spanish bonds — both of which rallied to take yields off their highest levels of the session.

Benchmark 10-year Italian yields were 2 basis points higher on the day at 7.07 percent, compared with 7.17 percent before the bond auction.

Such elevated levels could pose problems for Italy as it looks to refinance around 100 billion euros of maturing bonds and coupon payments between January and April.

Market participants said the extent to which the negative tone for lower-rated euro zone bonds would continue into next year was difficult to predict until market activity picked up to normal levels early next week.

LONDON, Dec 27 (Reuters) – Italian government bond yields edged higher on Tuesday and were expected to rise further this week with investors growing nervous that thin liquidity may complicate Rome’s plans to sell 8.5 billion euros worth of debt.

In choppy trade, 10-year Italian bond yields rose as much as 11 basis points on the day to 7.13 percent, before recovering some ground, with more pressure seen likely ahead of three- and 10-year debt auctions on Thursday.

“The 10-year is the area where Italy has to rely more on foreign investors and it will be very tough to sell especially at this point in the year, so I expect further cheapening of the bond going into the auction,” ING rate strategist Alessandro Giansanti said.

“The three-year would be easier to sell, there is some demand from the domestic investors. If they see really weak demand in the 10-year … they may sell more short-term (debt).”

The 7 percent level is roughly the threshold beyond which other euro zone governments have been forced to seek bailouts and markets will get increasingly nervous if yields stay above it for a prolonged period when trading picks up early next year.

Key concerns for the market will resurface in January, with many still looking for policymakers to put in place sufficient measures to insulate Italy from the debt crisis.

Politicians agreed landmark steps towards fiscal union earlier this month. But with the ECB still refusing to ramp up its bond-buying programme and efforts to provide aid through the IMF making limited progress, some see considerable risks for that Italy will struggle to refinance its large maturing debts.

FRANKFURT/LONDON (Reuters) – Liquidity levels in the euro money market soared to an all-time high on Friday, as the near half a trillion euros pumped into the system by the European Central Bank this week in its first ever three-year loans ballooned the amount banks were holding.

Banks borrowed a record 489 billion euros from the ECB earlier in the week in the first of two opportunities they will have to get the all new three-year loans from the ECB.

With the money now in banks’ accounts, the amount of excess cash in the euro zone’s financial system hit a record high of 483 billion euros, taking it soaring beyond the 350 it hit in mid 2010 after the ECB had pumped in three rounds of one-year funding.

This week’s move by the ECB marks its most dramatic attempt of the crisis so far to bolster banks’ finances. It is a tactic it hopes will minimize the chances of banks responding to the euro zone turmoil by slamming the brakes on lending.

As well as giving banks the opportunity to borrow direct from the ECB, the move works by making getting cash cheaper for banks as the heavy oversupply in the system puts downward pressure on the rates charged on normal bank-to-bank markets.

Three-month Euribor rates, traditionally the main gauge of unsecured interbank euro lending and a mix of interest rate expectations and banks’ appetite for lending, fell to 1.404 percent from 1.410 percent on Friday as a flood of new cash entered the financial system.

Longer-term rates also fell. Six-month rates ticked down to 1.658 percent from 1.662 percent, while 12-month rates eased to 1.988 percent from 1.995 percent.

LONDON, Dec 23 (Reuters) – Italian bonds were the main underperformer in euro zone government debt markets on Friday, with yields rising relative to Germany as investors looked ahead nervously to Italy’s final bond auctions of the year next week.

Market activity was very thin in the last trading session before Christmas, exaggerating any price moves, but Italian bond yields rose across the curve, with the 10-year yield breaking above the 7 percent level.

That level has been seen as the key benchmark, above which doubts escalate about whether Italy can afford to fund its maturing debt.

Supply worries will dominate trading ahead of large Italian redemptions early next year, with the next test coming as soon as next week at sales of three and 10-year debt.

“It’s going to be a pretty tough month for BTPs. It really does depend which side of the bed the market gets out of on the first trading day of next year,” said David Keeble, global head of fixed income strategy at Credit Agricole.

“It’s sentiment driven so it could go very well, it could go very badly, I just don’t think there’s much inbetween.”

Doubts also grew over whether huge demand for the European Central Bank tender of cheap banking loans earlier this week will be effective in easing the strain for troubled euro zone economies.

LONDON, Dec 22 (Reuters) – Spanish and Italian bond yields crept higher on Thursday and underperformed German debt as markets grew sceptical that banks would use funds borrowed from the European Central Bank to buy lower-rated government bonds.

Banks borrowed a huge 489 billion euros from the ECB at an unprecedented offer of three-year loans on Wednesday, which some had expected to be reinvested in Spanish and Italian debt and help ease borrowing costs.

But, those looking for an immediate boost to Italy and Spain were likely to be disappointed. Traders said the preference was to reinvest some of the funds into safe-haven paper rather than pick up the higher yields on offer from some of Europe’s more troubled states.

“What happened yesterday is not a silver bullet to the crisis… but it is too soon to see the impact yet,” said Niels From, strategist at Nordea in Copenhagen.

“Even though we haven’t really seen outperformance in Spain and Italy since yesterday, I still see the auction as supporting those two countries, but I don’t see this causing a major spread narrowing.”

Spanish 10-year bond yields were 8 basis higher at 5.39 percent and equivalent Italian yields were up 5 bps at 6.86 percent. The rise unwound only part of a sharp fall in both countries’ borrowing costs seen in the run up to the ECB operation.

Bund futures settled flat at 137.83, with traded volume extremely light at just 235,000 lots, well below a daily average of nearly 1 million lots seen in November.

LONDON, Dec 21 (Reuters) – Huge demand for the European Central Bank’s offer of three-year loans to banks should push short-term rates lower and ease the risks of lending between banks, but a swift recovery in the interbank market is seen as unlikely.

Banks borrowed a record 489 billion euros at the ECB’s first ever three-year lending operation, designed to provide long-term funding for banks struggling to raise cash on the open market because of concerns about their exposures to sovereign debt.

But, the success of the attempts to shore up confidence in the sector and spur lending between banks rests on whether financial institutions choose to hoard the cash to pay their own debts, or resume lending.

“People rightly will want to get a better feel for what’s happening to all this cash,” said Simon Smith, chief economist at FXPro in London.

“It should improve conditions, lighten some of the strains seen in repo markets and tighten Libor/OIS spreads but, I’m not thinking this will happen substantially in the next few days.”

With the ECB pumping more cash into the system, abundant money supply meant overnight rates were likely to fall from their already low levels.

Barclays Capital forecast the overnight Eonia rate should fall from its current level and remain close to the rate the ECB pays on overnight deposits, currently at 0.25 percent. Eonia fixed at 60 basis points on Tuesday.

LONDON, Dec 14 (Reuters) – Strong demand for the relative safety of dollars, needed to bolster balance sheets into year end, saw banks’ dollar borrowing triple on Wednesday at the ECB’s weekly loan offering, against a backdrop of rising funding costs in the market.

A total of 12 banks used the European Central Bank’s seven-day dollar swap line, borrowing $5.122 billion — three times the $1.602 billion borrowed at last week’s tender.

The surge came two weeks after central banks slashed the cost of accessing the swap line and as the cost of raising dollars from the market rose, making funding via the ECB more attractive.

“Until year-end there’s an aversion generally to expanding balance sheets so this is exactly the kind of time you would expect market pricing to be unattractive relative to these official tenders,” said Laurence Mutkin, strategist at Morgan Stanley.

Dependence on the ECB as a source of dollars has grown as the debt crisis raging in the euro zone has pushed U.S. money market funds to cut back their lending into the currency bloc, spurring the ECB to step up its support for banks.

The euro/dollar cross currency basis swap market, which shows the cost of swapping euros into dollars, indicated a rising premium on sourcing dollar funding from the market.

The premium charged on a three-month swap continued to rise, reaching levels last seen at the end of November at around 150 basis points.

LONDON, Dec 13 (Reuters) – Italian government bond yields rose on Tuesday as the risk of sovereign rating downgrades across the euro zone kept markets nervous before Wednesday’s test of appetite for its 5-year debt.

Spanish yields fell across maturities by late European trading after the country drew strong demand at its sale of 12- and 18-month Treasury bills although one analyst said it could not be seen as a precursor to Spain’s longer-term debt sales on Thursday given that it was “balance sheet paper”.

Italian 10-year yields rose as far as 6.78 percent and could soon rise back to 7 percent, according to analysts, although this would also depend on the scale of European Central Bank bond-purchasing. Five-year debt traded around 6.86 percent.

“In the absence of positive news, (7 percent) is certainly the path of least resistance and that level we could easily meet within the coming sessions,” Richard McGuire rate strategist at Rabobank said.

The European Union last week took steps towards greater fiscal integration but it was not seen as enough to draw a line under the euro zone debt crisis.

Italian 10-year yields were up 12 basis points at 6.72 percent before Wednesday’s sale of 2016 bonds. Rome is likely to pay a record cost to borrow after the EU summit last week failed to reassure financial markets.

But Spanish government bond yields were lower on the day after solid demand for the country’s T-bills.

LONDON, Dec 13 (Reuters) – Italian bond yields rose on Tuesday as markets fretted over the risk of sovereign rating downgrades across the euro zone after steps towards fiscal integration failed to ease the debt crisis in the short term.

Spanish bonds also underperformed relative to German debt as riskier assets suffered due to the risk that rating agency Standard and Poor’s could act on its warning over the region’s debt ratings.

Measures to strengthen budget discipline agreed at a European Union summit last week were not seen as sufficient to ease immediate market worries over sovereign debt — something only a huge financial backstop provided by the European Central Bank was seen likely to achieve.

“People are picking holes in the summit… it hasn’t done anything major and we’re looking out for some sort of ratings action sooner rather than later,” a trader said.

Peripheral debt was likely to remain under pressure in the near term but reluctance to trade into the year-end and persistent ECB bond-buying intervention could delay any major sell-off, he added.

Italy’s 10-year yield rose 16 basis points on the day to 6.76 percent while the Spanish equivalent was 11 bps higher at 5.92 percent.

Bund futures edged up six ticks to 136.60, extending large gains made on Monday. Technical charts showed a break above Friday’s high of 137.12 would open the door for fresh rises, possibly testing the 139.58 high set in mid-November, said Futurestechs analyst Clive Lambert.

LONDON, Dec 12 (Reuters) – Bond investors ditched Italian and Spanish bonds and bought up German Bunds in search of low-risk assets on Monday as confidence crumbled that last week’s steps towards closer euro zone fiscal integration would halt the debt crisis.

Markets grew increasingly sceptical that an agreement on stricter budget rules and a stronger fiscal union was enough to bring the region’s debt crisis under control — unless it spurred the European Central Bank to ramp up the scale of its bond-buying intervention.

“We have a nice agreement: a fiscal compact, commitments to keep fiscal deficits down. But, actually, does any of this solve the euro crisis? No it doesn’t,” said Victoria Cadman, economist at Investec in London.

“We still sit here searching for the big bazooka solution.”

Although the ECB was seen intervening in Italian debt markets throughout the day, it has not indicated it is prepared to increase the scale of its bond purchase programme. Data showed that the central bank slashed the amount it spent buying bonds in the run up to last week’s summit.

Markets were also on alert for news from ratings agency Standard & Poor’s, which on the eve of Friday’s EU summit warned it might downgrade most euro zone countries if they did not come up with a decisive set of anti-crisis measures.

“It seems like the market is expecting some kind of move (from S&P) and that has heavily influenced the sovereign risk market today,” said Morten Hassing Povlsen, strategist at Nordea in Copenhagen.