EURO GOVT-Bunds lower, Italy sells note, bills

* Bunds lower after disappointing U.S. auction

* Italy sells zero coupon bonds, bills

By Kirsten Donovan

LONDON, Dec 29 (BestGrowthStock) – German government bonds fell on
Wednesday after U.S. Treasury yields jumped overnight as an
auction of five-year notes drew dismal demand, raising concerns
for a sale of seven-year paper later in the session.

Italy sold short-term bonds and bills, with yields on both
rising from previous similar sales.

Dealers took more than half of Tuesday’s $35 billion Treasury
auction, with the high yield at 2.15 percent, 4.65 basis points
higher than where current issues were trading at the time of the
sale [ID:nN28201934].

“Bunds are likely to remain in a broad 124.00-126.00 range
for the rest of the week with direction coming almost entirely
from U.S. Treasuries,” said Everett Brown, bond strategist at
IDEAglobal.

“The medium-term trend for both markets is down however, a
trend which we think will resume in January with Treasuries
underperforming on the way down.”

March Bund futures (FGBLc1: ) were 41 ticks lower at 124.78,
although above levels seen in after-hours trading on Tuesday.

UBS technical analyst Richard Adcock said a break below
124.36 could see the market move towards December’s low of
123.76.

Two-year German bond yields (DE2YT=TWEB: ) were 2 bps higher
at 0.902 percent, with 10-year yields (DE10YT=TWEB: ) 3 bps higher
at 3.021 percent.

But with many market participants out of the office over the
holidays and many investors waiting until the new year to open
fresh positions, trading in both core and peripheral euro zone
debt was thin.

Peripheral yield spreads narrowed as Bunds bore the brunt of
the Treasury-led sell-off, although illiquidity in non-core debt
markets exaggerated any moves.

Pressure is expected to resume in the new year on Portugal
and other euro zone states struggling to address the debt and
banking problems at the heart of the region’s debt crisis.

Italy sold 3.5 billion euros of zero coupon bonds (CTZs)
maturing in December 2012 as well as 8.5 billion euros of
six-month bills, the full amount planned [ID:nMAT012392]
[ID:nLDE6BS0L2].

Yields at the bill auction were around 20 basis points
higher than the last sale, while the zero-coupon bond sale
attracted only slightly more bids than the amount on offer.

“The CTZs just about got covered but that’s just a
reflection of the illiquid markets at this time of year and the
fact that it was quite a large sale,” said Credit Agricole rate
strategist Orlando Green.

“The bill yields reflect concerns about the credit
worthiness of the euro zone periphery.”

EURO GOVT-Bunds lower, Italy sells note, bills