Italy's weak bond auction on Tuesday spooked traders, causing a drop in the prices for the country's government bonds
European banks could be forced to shrink their balance sheets by $2.6 trillion through 2013. REUTERS

Tuesday's weak bond auction by Italy signaled that investors remain worried that the heavily indebted euro zone nation could suffer a Greek-style default.

Italy sold €3.8 billion ($5.1 billion) in total, short of its €4 billion target.

The €2.82 billion of two-year zero-coupon bonds auctioned drew a lower yield but fewer bids than Italy's previous comparable auction, according to Bloomberg News. Italy also auctioned a combined €1 billion in inflation-linked bonds due in 2019 and 2021.

After the auction, however, the dealers who bought the paper had trouble offloading it in the secondary market, Reuters cited traders as saying. The bonds' yields, as a result, declined.

In the general secondary bond market, the price of Italian government debt fell as investors took refuge in the safety of German government debt.

Yields on 10-year Italian government bonds rose about 0.09 percentage point while those of their German counterpart dropped about 0.07 percentage points. Reuters noted that Italy's bonds were the euro zone's weakest performer Tuesday.

The country's auction on Tuesday alarmed traders ahead of a sale later this week of €8.5 billion in bonds.

The market's assumption was that this should go pretty well, and it's not gone that well, Marc Ostwald, strategist at London-based Monument Securities, told Reuters.

On Monday, traders' outlook on the European debt crisis was briefly cheered by Germany's support for enlarging the bailout funds for the euro zone.

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