EURO GOVT-Spanish vote concerns help German debt creep higher
* Catalonia separatist vote nudges safe-haven Bunds higher
* Markets priced for Greek agreement to unlock aid funding
* Longer-term outlook hinges on debt sustainability measures
LONDON, Nov 26 (Reuters) - German bonds rose on Monday as concern at the outcome of Spanish regional elections outweighed the market's growing optimism that lenders will finally come to an agreement on Greek aid later in the day.
Separatist parties from Spain's Catalonia region won almost two-thirds of seats in the local parliament, backed by voters frustrated over the country's economic crisis and a tax system seen as unfair to the wealthy region.
While the result underlined the political difficulties facing Spain's government, it fell short of the convincing separatist win needed to mount a push for a referendum on independence for the region.
"The Catalonian election was pretty much expected ... but any sign of Europe splitting up isn't great when they need to be going the other way," a trader said.
Bund futures rose a modest 17 ticks to stand at 142.29, adding to initial gains when European equity markets opened weaker.
Although there was limited reaction in Spanish debt, where 10-year yields edged 1.5 basis points higher to 5.65 percent, the election impact could be felt more over the longer term, analysts said.
"The separatist movement may ultimately impact on the market due to fiscal concerns," Rabobank strategists said in a note.
"Namely the worry that the central government's appetite for bringing the regions to heel in terms of budgetary alignment may be limited due to the risk of stoking secessionist ambitions."
BUND OUTLOOK MIXED
The rise in safe-haven German debt recovered some ground after a fall of almost a point last week based on the growing likelihood that lenders would agree a way to pay out much-needed bailout funds to Greece.
Euro zone finance ministers and the International Monetary Fund will meet later to discuss how to make Greece's towering debt levels more manageable, a necessary condition for the release of the country's latest aid payments.
"Agreement on the next aid tranche will not trigger any strong movement because it is well expected by the market - I don't think this will bear on the Bund any more than it already has," said BNP Paribas strategist Patrick Jacq.
Longer-term however, the clamour for the safety of German Bunds, which has pushed yield to historically low levels, could subside if attempts to set Greece's debt on a sustainable path are deemed credible by the market.
Options under discussion include a lowering of the interest rate on loans to Greece, deferring interest payments and buying back privately-held Greek bonds.
"Anything that could improve the overall situation in Greece could remove part of the risk-off (move) and therefore could slightly weigh on safe-havens, for sure," Jacq said.