EURO GOVT-Spanish yields ease on signs of bailout willingness
* Uncertainty over timing stems Bund sell-off * Austria sells 1.3 bln euros of bonds By Kirsten Donovan LONDON, Oct 2 (Reuters) - Spanish government bond yields eased on Tuesday on signs the country may be ready to ask for a bailout, but uncertainty over the timing of any request limited the move and stemmed a sell-off in safe-haven German Bunds. European officials told Reuters on Monday that Spain was ready to request a bailout as early as next weekend but that Germany had signalled it should hold off. Yields on two-year Spanish bonds were 16 basis points lower at 3.25 percent, with their 10-year equivalent down 12 basis points at 5.77 percent. Spain must request aid before the European Central Bank can step in and buy the country's bonds, something investors are keen to see happen, but the lack of clarity over the timing has kept market players on the sidelines. "Both Spain and Germany need market pressure to request/agree a bailout, and it's hard to do either of those things as long as Spain appears to be able to continue to fund itself," Rabobank rate strategist Richard McGuire said. "So if Spain is ready and willing to make that request, at least half the obstacles have been removed ... but we're not out of the woods yet." There has been speculation that Spain may delay its request until after regional elections on Oct. 21. Another possibility is that a request is made before an EU summit on Oct. 18-19. "The impression that Spain is looking more ready to ask for a bailout (is) helping particularly the short-end rally, but it's pretty much happening across the curve," a trader said. "The closer you get to mid-October, the more people would feel that Spain is getting close to asking for help," he added. MOODY'S AWAITED International investors have been steadily reducing their exposure to Spanish bonds this year, leaving domestic investors holding almost 70 percent of the paper. "There's some domestic flows, nothing spectacular though, and some international players putting some chips down," said a second trader, stressing that the latter was mostly so-called fast money such as hedge funds. "The same issues are still pending, but the market is more stable now." Dealers may try and cheapen the paper before the sale of up to 4 billion euros ($5.2 billion) of bonds with maturities of up to five years on Thursday, but the prospect of Spain making a bailout request should help the auction, McGuire said. Markets also awaited the outcome of a credit rating review by Moody's, in which Spain could lose its investment grade rating, which would likely trigger a new round of selling of its debt. "A Moody's downgrade for Spain could tip the balance for lower 10-year Bund yields towards 1.3 percent," Commerzbank strategists said in a note. "However, we see the odds slightly in favour of a rating confirmation and thus expect to see some relief in the periphery." December Bund futures reversed early gains and were down 18 ticks on the day at 141.22. Ten-year cash yields were 1.5 bps higher at 1.48 percent, having retreated from the 1.7 percent hit earlier this month. That level represents the top of the recent trading range and an important technical level to be overcome if Bund yields are to rise significantly. "Positioning is pretty square, and it doesn't seem like there's any real conviction in what the next big trade is ... but there's a recession coming ... so we expect the front end, especially five-years, to be quite well supported," another trader said. Austria kicked off the week's new issuance, selling 1.3 billion euros of 2019 and 2044 bonds to complete 85 percent of this year's funding target.