Norwegian financial services group, DNB Boligkreditt, may be among the first issuers in the primary bond market early next year as it announced Wednesday it was planning a potential euro-denominated, benchmark-sized, covered bond.

However, the European primary bond market remained shut Wednesday, while the cost of insuring European sovereign and corporate debt was mixed after a successful European Central Bank Long Term Refinancing Operation three-year allotment beat market expectations.

DNB Boligkreditt followed the lead of Lloyds TSB Bank PLC's Tuesday announcement of a potential euro-denominated covered bond sale early in January.

DNB Boligkreditt's bond will be backed by 100% prime residential Norwegian mortgages and is scheduled to launch at the beginning of 2012, subject to market conditions.

Meanwhile, the LTRO saw positive results, the allotment hit a record of EUR489.19 billion and was used by 523 banks, but Italian and Spanish government bond yields crept up causing the cost of insuring European sovereign debt to rise slightly.

"In a nutshell, the three-year auction can been considered as successful in terms of adding liquidity to the banking sector. We believe most of the take up has come from euro-zone periphery banks which have more problems with long-term funding," said Annalisa Piazza, an analyst at Newedge Strategy.

Initial market reaction caused a very short-lived rally, but sentiment turned less bullish as market participants remained wary as the currency bloc's debt crisis remains unresolved and questions remain around what portion of the fresh money will end up in the government bond market.

"The ECB's commitment to ease the strain on funding within Europe's interbank market has provided a critical backstop for credit spreads, "Once again, the ECB is simply buying more time for euro-area politicians. Private investors will not return to bank [and government] funding markets until the sovereign crisis is stabilized," said Michael Symonds, an analyst at Daiwa Capital Markets.

At around 1345 GMT, the SovX Western Europe index, which investors can use to buy or sell credit default swaps on a basket of 15 sovereign borrowers, was one basis points wider at 357/365 basis points, according to data-provider Markit.

Credit default swaps are derivatives that function like a default insurance contract for debt. If a borrower defaults, sellers compensate buyers.

The iTraxx Europe index, which comprises 125 high-grade borrowers, 25 of which are banks and insurers, was three basis points tighter at 175/177 basis points. The Crossover index of 40 mostly sub-investment-grade European corporate borrowers was five basis points tighter at 765/773 basis points.

-By Sarka Halas, Dow Jones Newswires; +44 (0) 207 842 9236; sarka.halasova@dowjones.com

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