The ECB on Wednesday will offer low cost, three-year funds to banks for the first time, and some investors hope that a large take-up of the funds will ease pressure on bank balance sheets and stem the sell-off in European sovereign debt. "There is hope that the tender will set any disasters off into the future, pending a solution," said Lou Brien, market strategist at DRW Trading in Chicago. A Reuters poll showed euro zone banks were expected to snap up 250 billion euros at the tender, although forecasts ranged from 50 to 450 billion euros, indicating a high degree of uncertainty. It's also uncertain how markets will react to any take-up as large volumes of borrowing could ease fears that bank funding will improve, or alternatively spook investors that more banks may be struggling more than they thought. Risk appetite was also buoyed on Wednesday after a survey showed that German business morale rose sharply in December and as Spain sold debt at lower, though still high, levels. A US government report showing housing starts rose more than economists had forecast in November added to positive sentiment, which drove investors toward riskier assets like stocks at the expense of Treasuries. "That is making people more comfortable that we won't be sliding back into recession in the first half of next year," said Charles Comiskey, head of Treasuries trading at Bank of Nova Scotia in New York. "We're pricing a lot of bad news in here." Fears over contagion from Europe has boosted demand for US debt and pushed yields to more-than-two-month lows despite data that points to an improving economy. Some analysts expect yields to continue to push lower in the first quarter, with benchmark notes dropping to the 1.50 percent area, as European countries face heavy debt maturities, which may spark renewed concerns over the region. The Treasury saw strong demand from new debt sales on Tuesday, with record demand for four-week Treasury bills offering zero yields illustrating the dearth of safe options for risk adverse investors. "If you can get that many people agreeing that all they want is their money back, then it's not a positive sign," said DRW's Brien. The bid-to-cover ratio at Tuesday's one-month T-bill auction came in at 9.07, up from last week's 7.47 and the prior record of 7.66 set two weeks ago. Treasuries have benefited at the expense of the debt of top-rated European countries, including France, which are under threat of ratings downgrades that could further hurt their appeal to ratings sensitive investors, including central banks. The Treasury also saw firm demand for a sale for its $35 billion sale of new five-year notes, the second last coupon auction of the year. Indirect bidders took around half of the notes, which sold at a high yield of 0.88 percent. The government will sell $29 billion in seven-year notes on Wednesday.