* Clamour for safety recedes; Bunds dip, periphery rallies
* Lack of Cyprus meltdown spurs trimming of safety hedges
* Long-term worries persist, Italy yields seen rising
By William James
LONDON, April 2 German Bund futures fell and Italian and Spanish bonds made small gains on Tuesday with investors edging away from low-risk assets as fears of a major financial meltdown emanating from Cyprus receded.
As part of an international bailout agreed just over a week ago Cyprus is set to impose losses of around 60 percent on savers holding more than 100,000 euros.
The deal was the first in euro zone history to make savers share the burden, but Cyprus's banks reopened in orderly fashion on Thursday, allaying fears that long queues to withdraw cash could have sparked a wider bank run across the euro zone.
Bund futures hit a session low of 145.12 on Tuesday, down 37 ticks on the day, as traders closed out positions used to hedge against any contagion from Cyprus to the region's other struggling states such as Spain and Italy.
"The whole Cyprus story seems to have run its course. All news is pretty much priced in so you're seeing some fast money taking a bit of profit," one trader said.
Nevertheless, analysts said the relief was driven by a trimming of safe-haven bets rather than the start of a full-blown revival in appetite for risk-taking, with long-term investors still wary that the Cypriot rescue had set a template for future bailouts.
"Whenever we talk in the future about bank aid or bailout we will have these loss estimations there," said Michael Leister, strategist at Commerzbank in London.
Bonds issued by Spain and Italy made small gains but were expected to face selling pressure in the coming days, resuming a steady climb in yields over the last two weeks.
Italian 10-year yields were down 4 basis points on the day at 4.7 percent while equivalent Spanish yields were down by the same amount at 5.02 percent.
Italian yields have risen 18 bps since March 22, due also to its politicians' struggle to form a government after elections in February failed to produce a clear winner.
Italy's president acknowledged on Saturday that he had limited scope to force divided political parties to find a solution, but ruled out standing down early to make way for new parliamentary elections.
Alessandro Giansanti, strategist at ING in Amsterdam, said the impasse could still last some time.
"The market is under-reacting a bit to the negative political news... it's not something that will be solved in one or two weeks," he said.
Giansanti recommended using the current calm to take outright short positions in Italian bonds, also highlighting the risk that rating agencies could downgrade Italy if the deadlock dragged on.
Fitch has already downgraded Italy since the elections and Moody's, which rates the country even lower, at just two notches above junk, has signalled it is monitoring Italian events.
Spanish yields were also seen resuming their recent climb in the run up to bond sales due on Thursday. Madrid will seek to raise up to 4 billion euros in an auction of three-, five- and eight-year bonds that will draw added attention after sluggish demand at a similar sale by Italy last week.