Spanish debt has outperformed Italian paper on the perception that it poses less of a systemic risk to the currency bloc, and has less demanding refinancing needs in 2012. But a grim outlook for the country's public finances was beginning to take a toll on that out-performance. The spread between 10-year Italian yields and those of Spain tightened around 19 basis points this session to 161 bps after widening sharply in December. "Spain is rich," Padhraic Garvey, head of rate strategy at ING said. "I see Spain as vulnerable, so I am not surprised that it's selling off and I would be long Italy versus Spain from here." Spanish 10-year government bond yields jumped 20 basis points to 5.33 percent, with one trader saying one quite large UK account had sold 10-year Spanish bonds. "I have come across three or four accounts all of who agree Spain is looking very expensive versus Italy," the trader added. Spanish five-year government bond yields also jumped prompting the European Central Bank to intervene in that part of the curve, according to a second trader. Five-year yields last stood higher on the day at 4.47 percent. Germany and France will hold 2012's first bond auctions this week with market participants pointing to the 13 billion euros of supply as a short-term factor weighing on top-rated bonds. German Bund futures dipped in and out of negative territory on Tuesday but saw a settlement close of 138.29, up 10 ticks on the day. Bunds could be vulnerable to further selling after a rally in December. But any sell-off could be limited by ongoing appetite for safe-haven assets as the euro zone debt crisis continues to plague sentiment. Against this backdrop, Germany will sell 5.0 billion euros of 2 percent Bunds due in 2022 on Wednesday. "I think it will be fine," Garvey said. "My baseline view is that for the next few weeks auctions generally will get done. I think there is lots of cash out there to get put back to work." The key test of sentiment will be when Spain and Italy the two countries at the forefront of concerns about the region's ability to overcome its debt problems issue bonds next week. "Looking ahead it's going to be more interesting to see how the market handles Spain and Italy next week," said Eric Wand, strategist at Lloyds Bank in London. "The market will be pushing on an open door a bit in terms of trying to get a concession on the upcoming supply given they know there's a wall of refinancing to come and the market hasn't got the backstop it was looking for."