Italian government bond yields edged higher on Tuesday and were expected to rise further this week with investors growing nervous that thin liquidity may complicate Rome's plans to sell 8.5 billion euros worth of debt.

Ten-year Italian bond yields rose 8 basis points on the day to 7.10 percent, widening the spread over German Bunds to 515 bps. Italy plans to sell three- and 10-year debt in its regular month-end tender on Thursday. The 7 percent level is roughly the threshold beyond which other euro zone governments have been forced to seek bailouts and markets will get increasingly nervous if yields stay above it for a prolonged period when trading picks up early next year.

Investors fear that Italy, although having different debt dynamics than Ireland, Greece and Portugal, could suffer the same fate, especially as it faces around 100 billion euros in bond redemptions and coupon payments between January and April. Any early January signs that the banks that took almost half a trillion euros in cheap three-year loans from the European Central Bank last week will use any of the funds to buy high-yielding Italian and Spanish debt may lift sentiment.