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EURO GOVT-German yields rise after Draghi backs off rate cuts
* German Schatz yield hits highest in nearly three months
* ECB seen backing away from near-term interest rate cut
* Spanish bond auction sparks core debt selloff
* Spanish 10-year yield dips to 10-month low below 5 percent
By William James and Marius Zaharia
LONDON, Jan 10 (Reuters) - Yields on German bonds rose on Thursday after the European Central Bank left interest rates on hold and signalled pressure for a cut among the bank's governing council had eased.
ECB President Mario Draghi, speaking at the bank's monthly news conference, said the decision to leave interest rates at 0.75 percent was unanimous.
This contrasted with last month's signal that the ECB was divided on whether to cut rates, and caused investors to quickly price out lingering expectations of a near-term fall in the cost of borrowing from the central bank.
"The ECB's evident reticence to either cut interest rates or, more importantly, signal any possibility of future interest rate reduction has added to the pressure on core curves," said Rabobank strategist Richard McGuire.
German two-year bond yields, which are particularly sensitive to interest rate expectations due to their short duration, rose 4 basis points on the day to 0.107 percent, their highest since late October.
Bund futures extended an earlier fall to hit 142.73, down 85 ticks on the day.
Demand for longer-term, low-risk German debt had started falling earlier in the day after struggling euro zone sovereign Spain beat its own estimates at its first bond auction of the year by issuing more debt than it had initially targeted.
That calmed the markets' worst fears over how Madrid will meet it tough 2013 fundraising target and helped push the country's 10-year bond yield below the closely-watched 5 percent level for the first time in 10 months.
"It was definitely a strong auction. They exceeded the targeted amount, which is a good sign for the first auction of the year," said Norbert Aul, rate strategist at RBC Capital Markets.
"Supply will take its toll and will be heavy going forward. However we have a positive outlook for Spanish paper."
Spanish 10-year yields were last 21 bps lower on the day at 4.93 percent, on track for their second biggest daily fall in nearly three months.
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