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Weak stocks weigh on low-rated bonds, LTRO repayments eyed

* Spanish bonds lead lower trend, Bunds up

* ECB expectations stemming equity-related weakness

* Investors shrug off Italy growth, deficit revision

* LTRO repayments eyed as ECB's liquidity boost falls flat

By John Geddie

LONDON, Sept 26 (Reuters) - Peripheral euro zone government bonds opened a touch lower on Friday as weakness in global stock markets weighed on investor demand for riskier assets.

Spanish bonds led the losers after the country's share index had the worst start across the bloc, but analysts warned that expectations of further easing from the European Central Bank would stem the tide.

"There is clearly lower risk appetite in the market and we are see some rebalancing of portfolios," ING senior rates strategist Alessandro Giansanti said.

"But we should see this dissipate in the coming weeks as investors become ever more convinced that the ECB will have to take more drastic action on the policy front."

Spanish 10-year yields edged up 2 bps to 2.17 percent, while Italian and Portuguese equivalents ticked 1 bps higher to 2.36 and 3.15 percent respectively.

Greek bonds were flat at 6.17 percent after the sharp sell-off in recent sessions on expectations it plans to exit its bailout early, potentially compromising further debt relief and increasing its reliance on market finance.

German equivalents, meanwhile, were 2 bps lower at 0.96 percent.

Market reaction to the news that the Italian Treasury was preparing to cut its growth forecasts and raise budget deficit targets was muted, with many economists already predicting such revisions.

"It shouldn't be a surprise at all frankly, the data coming out in recent months shows not just that the recovery is sluggish but that there isn't much of a recovery at all," said RBC's European economist Timo del Carpio.

"We do expect things to start to improve a little towards year-end as domestic demand and private consumption starts to pick up but the problems Italy faces are long-term and structural in nature."

One government bonds trader noted that the weak data only served to add "further fuel to the flames" for more ECB easing, citing that as the reason investors had shrugged it off.

POLICY PROBLEMS

In money markets, analysts are keeping a close eye on the amount banks are set to repay of long-term loans (LTROs) next week for further evidence that the ECB's new measures have failed to significantly boost liquidity in the market.

The amount of LTROs due to be repaid will be released at 0900 GMT with some expecting a high number after the 19.9 billion euros repaid this week.

A tame take-up for the ECB's first offering of new targeted long-term loans, and poor demand at its weekly refinancing operation, has only succeeded in pushing excess liquidity up to about 122 billion euros.

This has had a modest impact on overnight bank-to-bank rates which dipped back into negative territory at Thursday's fixing having earlier this week been at the highest level -- when stripping out month-end spikes -- since August.

"The net liquidity impact of the ECB's first TLTRO has melted away to just 48bn following the announcement of 3y LTRO paybacks and lower than anticipated demand in the MRO," Commerzbank money markets strategist, Benjamin Schroeder, said.

Analysts are predicting a rocky road for money markets as excess liquidity dwindles with hopes for the next big injection pinned on the TLTRO offering in December.

The December tranche is expected to total 175 billion euros, according to the median forecast from 21 money market traders polled on Monday.

(Editing by Louise Ireland)

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