March 7, 2013 / 1:26 PM / in 4 years

EURO GOVT-Strong auction lifts Spanish debt as ECB holds rates

* Spain sells at top end of target, peripherals benefit

* Spanish issuance skewed towards 10-year sector

* Bund in tight ranges as investors brace for ECB's Draghi

By Ana Nicolaci da Costa

LONDON, March 7 (Reuters) - Spanish bond yields fell on Thursday after a strong auction but German Bunds stuck to tight ranges as investors awaited details of the European Central Bank's policy deliberations.

The ECB held rates at a record low 0.75 percent. Markets attention then turned to ECB President Mario Draghi's news conference, at which he will present the euro zone central bank's new forecasts for growth and inflation in the bloc.

Spain sold 5 billion euros of three bonds at auction on Thursday - at the top of end of the target range - attracting higher bids across maturities as investors continued to rely on the ECB's promise to buy bonds of countries that ask for aid.

The sale was skewed towards 10-year debt, a sign investors are confident enough to load up on longer-dated Spanish paper even though it falls outside the scope of possible ECB support, and while Italy struggles with political uncertainty.

"It's confirmation that Spanish bonds are reacting quite well, especially in the aftermath of the Italian elections," said Alessandro Giansanti, strategist at ING.

Ten-year Spanish government bond yields fell 9.4 basis points on the day to 4.93 percent. Average borrowing costs at the auction fell and the bid-to-cover ratios rose across the board, more than doubling in the case of the 2015 bond to 4.9 from 2.0 at a similar sale in January.

The successful result came as political stalemate in indebted southern European peer Italy after an inconclusive election raises fears of further instability in the euro zone.

Ten-year Italian yields were 3.9 bps lower at 4.63 percent, as its bond prices rose for a third consecutive day. But they remained well off two-year lows of 4.075 percent hit in late January - a sign of lingering political worries.

Sanjay Joshi, head of fixed income at London Capital Asset Management, which manages $1.5 billion in fixed income assets, said the fund had dipped back into Italian debt markets after a sharp post-election sell-off made them cheaper and attractive.

But over a six-month horizon it is still underweight peripheral sovereigns, citing the fluid political situation in Italy.

"Clearly the OMT (Outright Monetary Transaction, the ECB's bond-buying programme) threat remains in the background. That might continue to protect Italy and Spain but the volatility is extreme," Joshi said.

"From a strategic perspective on peripheral sovereigns, we are still remaining underweight i.e. zero exposure."

Standard & Poor's revision of its outlook on Portugal's BB sovereign rating to stable from negative also helped sentiment towards lower-rated euro zone bonds.

Ten-year Portuguese bond yields fell 19 bps to 6.02 percent.

ECB WATCH

German Bund futures stuck to tight ranges, with investors reluctant to put on big bets before Draghi's news conference.

Bund futures were up 5 ticks on the day at 143.30 as the March contract rolled into the June one. Analysts said there was further upside potential if Draghi is more downbeat on the euro zone's prospects than expected.

"I still think that Bunds will benefit from a slightly - not dovish Draghi, but one that will exacerbate the negatives ... by expressing his concerns about growth in the euro area," Michael Hewson, senior market analyst at CMC Markets, said.

Draghi is also expected to say there is no question of loosening the central bank's rules on bond buying to accommodate Italy, according to analysts.

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