EURO GOVT-Bunds stable; Spain seen under pressure

LONDON, April 30 Mon Apr 30, 2012 2:15am EDT

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LONDON, April 30 (Reuters) - German Bund futures held steady at the open on Monday with Spanish government bonds expected to stay under pressure before an auction on Thursday which will test investor demand for the country's debt after last week's surprise credit rating cut.

Spanish 10-year yields will likely retest 6 percent, a closely watched level it broke above several times last week, with gross domestic data later in the day expected to confirm a deepening recession.

Following on the heels of Standard & Poor's two-notch downgrade last week, this makes for a challenging backdrop for the country's sale of 3- and 5-year bonds on Thursday, with market liquidity potentially subdued by European holidays.

"We have a strong case for Spain to continue to underperform Italy with Spain under pressure on ratings jitters, upcoming supply, while Italian supply is out of the way," said Commerbank strategist Rainer Gunterman.

"Today we have Spanish GDP which is forecast to show a deepening recession so more trouble for Spain. Bunds will be supported, possibly edging closer to the record highs we have seen."

The June Bund future was three ticks up at 140.73 compared with 140.70 at Friday's settlement. German 10-year yields were little changed at 1.71 percent.

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