Italy sold 3 billion euros (2.5 billion pounds) of five-year government bonds on Wednesday at a euro-era high yield of 6.47 percent, up from 6.29 percent at the previous comparable auction.

Germany also sold debt, raising 4.2 billion euros at an auction of two-year bonds at an average yields of 0.29 percent, compared with 0.39 percent at the last such auction.

The German sale drew bids worth 1.4 times the amount on offer, up from 1.1 times.

LATEST COMMENTS:

On Italy:

SERGIO CAPALDI, STRATEGIST, INTESASANPAOLO, MILAN

The auction went well with demand at 1.417 times the offer. It should be noted furthermore the yield came out well below market levels, which indicates a strong interest from investors.

On Italy:

PETER CHATWELL, RATE STRATEGIST, CREDIT AGRICOLE CIB

The 5-year BTP auction looks fairly good technically, coming well through secondary market levels and with the full amount being issued. The bid cover ratio of 1.47 is OK, given that we are in December. However, yields are still pushing higher at the auctions, meaning that the longer term picture is still one of funding stress in the euro sovereign market.

On Italy:

MICHAEL LEISTER, STRATEGIST, WESTLB, DUESSELDORF

It's actually a decent auction in my opinion. When you look at the bid-cover it doesn't look great but when you compare to the average for the bid-covers we've seen for five year Italian auctions this quarter it's actually a tad above that. Indeed, this is clearly a positive sign and shows that it's not all bad. Particularly keeping in mind the market underperformance we've seen in the last couple of sessions.

On Germany:

MARC OSTWALD, STRATEGIST, MONUMENT SECURITIES, LONDON

All in all not too bad.

It's a combination of year-end safe haven (bid) and it will also be window-dressing on the bank side of the equation, window-dressing just to make sure that they have got their books fairly flat ahead of year-end. Also they need to have stuff on their balance sheet and this is exactly the sort of paper that goes onto bank balance sheets.

EARLIER COMMENTS:

On Italy:

ANNALISA PIAZZA, MARKET ECONOMIST, NEWEDGE STRATEGY

Italy sold ...the top of the target level. The line was priced at an average 6.47 percent, a record cheap level. Given the large concession given ahead of today's tap, we expected demand to be a touch stronger. However, uncertainties on the future of the debt crisis remain high and the market seems to be mainly driven by flight-to-quality this morning.

On Germany:

PETER CHATWELL, RATE STRATEGIST, CREDIT AGRICOLE CIB

Schatz auction OK with 5.98 billion bids for 5 billion euro auction. Tail OK at 2 cents, albeit slightly larger than recent Schatz auctions. The yield of 0.29 percent is clearly much lower than the previous auction (0.39 percent) reflecting the increase in demand for short-term paper following ECB rate cut, increase in ECB liquidity etc.

On Germany:

MICHAEL LEISTER, STRATEGIST, WESTLB, DUESSELDORF

It's a bit of a mixed bag. You could argue that looking at the pricing and price action... it's not the best of the results. But then when you look at things like bid cover and the total bids and Bundesbank retention you could say it was never going to be a great success anyway. Especially given the current yields at the front end.

To sum it up, it's an unconvincing auction but nevertheless it should be enough to contain or stabilise sentiment going into the end of the year.

MARKET REACTION:

- German Bund future up 17 ticks at 136.78 vs 136.77 before auction

- German Schatz future down 0.02 at 110.12 vs 110.115 before auction

- Italian/German 10-yr bond yield spread 687 bps vs 685 bps before auction

BACKGROUND:

- The previous two sales of the Italian September 2016 bond produced yields of 5.32 percent in October and 6.29 percent in November.

- Italy's borrowing costs have risen in recent months as the focus of the euro zone debt crisis has turned on the country's high debt-to-GDP ratio, leading investors to question its financing sustainability.

- Although a German five-year auction last week saw strong demand, three out of four of the country's previous auctions drew less bids than the amount on offer.

- For weekly debt supply outlook, click

(Reporting by London Government bond desk)