1. ECB Deposit Facility Hits Fresh Record

The number of European banks using the ECB's overnight deposit facility it yet another fresh record with €463.56 billion deposited there last Friday. That's an increase from the €455.3 billion parked their on Thursday. This tells us that European banks continue to hoard the cash that they received from the ECB's three-year LTRO operation and that they are reluctant to lend to each other in interbank lending markets. This may put to rest the idea that the run-up in the use of the facility was a result of holiday conditions to end 2012 as we are now two weeks removed from then. We will get the ECB's perspective on use of the deposit facility in Thursday's press conference with ECB president Draghi.

2. Investors Paying Germany to Own its Bills

Germany us auction off new six-month bills in today session and paid a -0.0122% yield. that means that investors are willing to pay for the privilege of Germany lending them money short-term. That implies a scramble for the safest assets and concern by investors and banks that the real yields when considering inflation will be even weaker.

From Financial Times: A €4bn auction of six-month bills drew a negative yield of 0.0122 per cent in a sign of Germany's haven status amid the eurozone debt crisis.

But demand for the debt was down with the so-called bid-to-cover ratio dropping to 1.8 times from 3.8 times at the previous auction a month ago.

German short-term debt has traded at negative yields in the secondary market for some weeks with three-month, six-month and one-year debt all below zero. Bills for six-month debt hit a low of minus 0.3 per cent shortly after Christmas.

While I don't have the 6-month yield, here is a look at the 1-year yield in Germany, which too trades in negative yield on the secondary market.

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3. Merkozy Speak - Market Doesn't Listen

In the meeting between Merkel and Sarkozy there are indications that the two are moving forward in creating the mechanisms for implementation of the fiscal compact needed to bring euro zone countries deficits back into line and to restore market confidence.

width=386They also said they were ready to examine how to speed up capital payments into the ESM - the regions permit rescue fund, whose introduction is being spend up to mid-2012. For the most, part the market has gotten so used to these joint conferences that their pronouncements were brushed off by market participants.

Also, Germany seems to have been swayed by Sarkozy in agreeing to a financial transaction tax.

From Bloomberg: The French government, long a proponent of the tax, stepped up its campaign last week, going so far as to suggest that France would impose the levy even if others didn't. At a joint press conference in Berlin with Sarkozy today, Merkel threw her weight behind the tax.

Personally, I'm in favor of thinking about such a tax in the euro zone, Merkel said. Germany and France both equally view the financial transaction tax as a correct response.

4. Yields Ease on Periphery, But Italy Still Above 7%

Italian yields eased slightly in today session but the 10-year yield remained above 7%. This implies a little bit of easing in the concern regarding the sovereign debt situation but we do have Italy auctioning off more debt this week which will be a better gauge of demand for the country's bonds. Was also reported that the ECB was in the bond market for Italian bonds, thereby this drop in yield was likely a product of ECB intervention.

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The the difference between Germany's and Italian 10-year yields is now trading at around 526 basis points which is above the level at which LCH.Clearnet raised margin requirements to trade Italian that last year. Such a hike again, which has been done when the spread between German and a periphery country's yields was above 500 basis points would cause a another round of selling in the Italian bond market.

5. Italian Stocks Slide, Let by Weaker Banks

Pressure continued to build on Italian stocks, with UniCredit shedding another 10.5% to put it about 44% lower than a week ago as it tries to raise capital.

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- Nick Nasad is the Chief Market Analyst at FXTimes - provider of Forex News, Analysis, Education, Videos, Charts, and other trading resources.