The Irish government has set aside about 35 billion euros for its debt-ridden banks and the tests are expected to show banks needed less than that, but even a surprisingly positive result may be powerless to reverse a rising trend in yields.

Most analysts expect any potentially good news to be countered by a ratings downgrade. Standard & Poor's downgraded Greece and Portugal on Tuesday, citing risks the countries' debts to a new European bailout fund would be repaid before bond investors.

Ireland, a receiver of financial aid, faced the same risks mentioned by S&P, but its rating was still three notches higher than Portugal's. S&P said it was "focussed" on the results of the tests and they would have an effect on its next move.

"I think the market is positioned for less (capital than the government has set aside), but it is a pretty enormous figure no matter what," one trader said.

"It is an illiquid market, but the better bias is to sell as Ireland may be downgraded after the stress tests."

Irish/German 10-year debt yield spreads were last 3 basis points tighter on the day at 680 bps. Equivalent Greek/German spreads were slightly wider, while Portuguese markets were steady.

The credibility of the stress tests was also questioned by some in the market, pointing to results of similar exercises in the past which prefaced still-deepening banking problems in Ireland and Spain.

"Governments and officials can do a lot of tests, but the question is whether the market is going to believe them," said Michael Leister, strategist at WestLB.

ING strategist Alessandro Giansanti said a steady trend of rising yields in Ireland, supported by expectations it will eventually have to restructure its debt, can only be reversed if the country posted "very good" economic growth data.

DECOUPLING

Italy saw healthy demand at an auction of 9.17 billion euros worth of bonds earlier in the day and the sale signalled further decoupling from troubled markets in Athens, Lisbon and Dublin.

Italian and Spanish spreads over German Bunds held their own over the past weeks, despite renewed pressure in the euro zone's highly-indebted "periphery" caused by a raft of ratings downgrades and a government collapse in Portugal.

"We stick to our tactical spread tightening recommendation in (Italian) and Spanish government bonds versus Bunds as long as the decoupling story of those bonds ... continues to run its course," said David Schnautz, rate strategist at Commerzbank.

Investors remained eagle-eyed for any fiscal slippage or disappointing economic growth data in Spain, analysts said.

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Bund futures were last 17 ticks down on the day at 121.33, tracking losses in US Treasuries triggered by a Federal Reserve official saying it should trim its bond-buying campaign.

"The Fed was hawkish and that is weighing on Bunds as well, it's reminding people the ECB (European Central Bank) is going to hike next week," another trader said.