UPDATE 3-Italy debt futures gambit gets mixed reception

(Recasts lead, updates prices)

By Jamie McGeever

LONDON, Sept 14 (Reuters) - An attempt to reshape trading in Italian and other non-German euro zone debt met with a mixed reception on Monday, with investors cautious over how interest in a new Italian government bond future will shape up over coming weeks and months.

The contract, launched on the Eurex Derivatives exchange, is aimed at providing bond investors greater flexibility in hedging their exposure to not just Italian bonds but all non-German "peripheral" euro zone government debt.

Many dealers were simply uninterested in the launch, and the long-term success of the contract won't be apparent in the first days or weeks of trading, and attempts to introduce similar products in the past have flopped.

But others argue the seismic shift bond markets have undergone in the last two years -- as governments borrow and spend their way out of recession and the financial crisis -- suggest there will be sufficient interest this time around.

Trading volume gradually picked up as the session progressed, with more than 5,000 lots having changed hands at 1130 GMT. The established, much deeper and more liquid Bund future market had seen more than 200,000 trades.

But it was far too early to say if the contract will attract the necessary liquidity to make it a success, or what that level of liquidity might be, analysts said.

"It will take a bit of time before a critical mass enters the market," said Luca Cazzulani, deputy head of fixed income research at Unicredit in Milan.

"This is a very useful instrument with very high potential." Fixed income analysts at KBC agreed the contract should prove an extremely useful hedging instrument, and said it could boost interest in Italian cash bonds.

"A successful introduction may mainly help longer-term Italian government bonds to outperform their counterparts," they said in a note to clients on Monday.

At 1130 GMT the BTP future was trading at 114.89 , down 29 ticks from indicative prices quoted late on Friday. Traded volume was around 5,300 contracts, and the bid/offer spread had narrowed to only 1 tick from 8 earlier.

WIDE SPREAD

Not only is 2010 debt issuance expected to outstrip this year's record levels but divergence between intra-euro zone yield spreads remains wide, both between peripherals and German Bunds and among peripherals themselves.

Cazzulani at Unicredit said there had been "very strong" interest shown in the new BTP bond future from a wide range of investors including funds, banks, insurance companies and overseas accounts too.

Others were more sceptical.

"We hadn't seen much interest in it ahead of time from people," said one trader in London, while another was even more dismissive.

The yield on the 10-year cash Italian bond was 4.055 percent, up 1.5 basis points from late Friday and some 82 basis points above benchmark German Bund yields, up 2 basis points from late on Friday.

Yields on other benchmark 10-year "peripheral" bonds like Irish paper were up 4 basis points, showing that they were underperforming Italian debt, Reuters data showed.

Italy auctioned almost 3 billion euros of 5-year BTP bonds earlier on Monday in what analysts said was a successful sale.

The quotes for the BTP future can be seen on page for December expiry and on for March 2010 expiry. For more details on the contract's specifications, see:

http://www.eurexchange.com/trading/products/INT_en.html