* Concerns emerge around size of bailout for Italian banks
* Germany's 10-year Bund yield hits seven-week low
* Safe haven assets in demand as year draws to a close
* Spread between U.S. and German bonds hit fresh high
By Abhinav Ramnarayan
LONDON, Dec 28 Euro zone bond yields fell across
the board on Wednesday as concerns about the strength of a
rescue plan for Italian banks pushed investors to the safety of
Germany's 10-year yields hit their lowest in seven weeks and
other euro zone equivalents were also in demand.
On Monday, the European Central Bank told ailing Italian
lender Monte dei Paschi di Siena that its capital shortfall had
risen to 8.8 billion euros ($9.2 billion), from 5 billion euros
This raised questions about whether the 20 billion euros
earmarked by the Italian government would be enough to cover the
funding requirements of all the country's banks.
An Italian Treasury source told Reuters this week that the
amount would be enough, but investors are still
concerned, said DZ Bank strategist Andy Cossor.
"The latest news about the Italian banking system may well
be pushing investors into the safe haven of the Bund market," he
"It is not an insignificant factor, because the Italian
government is putting aside 20 billion euros and there are
questions marks over whether this will be enough. The market
would like to have some clarity on this subject."
Germany's 10-year bond yield hit 0.18 percent in early
trades, the lowest since Nov. 9, down 1 basis point on the day.
"Also, good quality safe haven assets are usually in demand
at the year end - investors want to close their books with some
safe assets in them," said Cossor.
The broad rally in euro zone government debt also boosted
Italian bonds. Ten-year yields fell 2 bps to 1.81 percent,
reversing losses from earlier in the week.
Highlighting the divergence between the U.S. and Europe,
10-year U.S. Treasury yields rose overnight to 2.56 percent
after U.S. consumer confidence hit its highest level in more
than 15 years in December.
The gap between benchmark German and U.S. yields hit a high
of 237 bps on Wednesday. The spread has been increasing recently
on the divergence between European and U.S. central bank policy
and outlooks for growth and inflation.
For Reuters new Live Markets blog on European and UK stock
markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets
($1 = 0.9578 euros)
(Reporting by Abhinav Ramnarayan; editing by John Stonestreet)