EURO GOVT-Spanish yields rise as bailout prospects dim
* Ministers signal no imminent bailout, Spanish yields rise
* IMF deficit targets bode ill for Spain over medium term
* Bunds struggle to make headway before five-year auction
By William James
LONDON, Oct 9 (Reuters) - Spanish bond yields rose on Tuesday when investors trimmed expectations of a swift solution to Madrid's debt problems while the country's politicians resist seeking a bailout.
Madrid is battling to keep borrowing costs at an affordable level against a backdrop of deep recession, rather than turning to its euro zone peers for a bailout programme.
The International Monetary Fund said in its latest round of global reports that Spain will miss its deficit targets this year and next and debt will jump to more than 90 percent of gross domestic product in 2013.
Late on Monday, finance ministers meeting in Luxembourg said Spain was taking steps to overhaul its economy and was funding itself successfully in financial markets.
Investors expect that Madrid will ultimately have little choice but to ask for help, and have already bought Spanish debt in expectation of the aid request unlocking the support of the European Central Bank's bond buying programme (OMT).
But, while there are no signs of that being imminent, bonds of both Germany and Spain are set to stay near current levels.
"The vibe on the trading floor is really quiet here... The whole market is really holding its breath because no one wants to get caught offside by the ECB," said Lyn Graham-Taylor strategist at Rabobank in London.
"But on the other hand if no one does that we're going to be left in this weird phase, waiting to find out if the OMT will work while all the economic metrics continue to be poor."
Spanish 10-year government bond yields have settled in a range well below the July peak of 7.8 percent but have struggled to move far in either direction with few willing to put pressure on Spain by selling, only to then be caught out by ECB buying.
Ten-year yields were 10 basis points higher on the day at 5.83 percent.
Despite the doubts on Spain, German Bunds futures, the currency bloc's safe-haven of choice, struggled to make much headway, closing the day 10 ticks higher at 141.49 having earlier run up against technical resistance near the bottom of the recent 141-142 range.
"We got down to 141.05 and I think there was some decent buying seen there. We are trading in a pretty tight range and most people are just playing technical levels," a trader said.
UBS technical analysts Richard Adcock said a break below 140.60 - the 38 percent retracement of September's rally would risk a further sell-off in the futures contract to 139.76 and the Sept. 17 low at 138.41, the bank's target level.
Analysts said the relatively stable range seen in Bunds over the past week could support an auction of five-year paper due on Wednesday after recent spates of volatility have caused weak demand for newly-issued German debt.
German redemption and coupon payments worth 18 billion euros should also help smooth the sale.
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