* German debt up after Fed maintains stimulus stance
* Month-end buying by index-trackers also supports Bunds
* Italian debt rally seen taking a breather
By Marius Zaharia
LONDON, Jan 31 (Reuters) - German Bund futures rose on Thursday after the Federal Reserve left in place its $85 billion per month bond-buying stimulus plan and said U.S. growth had paused.
That gave a lift to U.S. Treasuries, which often move in tandem with Bunds as the two assets are seen as among the safest investments.
"The read is that they are holding on to their policy because growth has paused. I don't think there are any hints in there that suggest there are going to change (policy) any time soon," one trader said.
Month-end buying by investors adjusting their portfolios to match the bond index they track also helped push German debt higher after five consecutive sessions of falling prices.
Bund futures were last 48 ticks higher at 141.91, having fallen by more than two points in the past five sessions.
"Treasuries had a pretty decent rally last night after the FOMC (Fed meeting), with 10-year (U.S.) yields pulling away from 2 percent. That's obviously significant and Bunds are following that lead," a second trader said.
Traders said, however, that above-forecast economic data earlier this year had raised expectations of improving U.S. growth and many in the market were betting the Fed might turn reluctant to maintain its stimulus programme later this year.
That should keep investors inclined to jeep selling Bunds, which have had a poor start to 2013 -- at 1.68 percent, German 10-year yields were about 35 bps higher than at the end of 2012.
This week, larger-than-expected repayments by euro zone banks of three-year loans to the European Central Bank have weighed on German debt.
"We keep trying to recover and we keep being knocked back," the first trader said. "It feels like a bear market and people are looking for reasons to sell into strength," he said, adding that Friday's U.S. non-farm payrolls report may trigger further weakness in Bunds.
Commerzbank strategists recommended investors buy Bunds, anticipating support from month-end flows.
Traders said hedge funds were selling Italian and Spanish debt to buy Bunds after the Fed meeting, and that pushed yields higher in the two countries.
Italian 10-year bond yields were 5.5 basis points higher on the day at 4.34 percent, while equivalent Spanish debt rose 6 bps to 5.26 percent.
Analyst said a six-month-long rally in Italian debt may have paused on worries that elections next month will result in a fragmented parliament that could hamper the next government's reform efforts.
Marking a shift in investors' behaviour from earlier this year, yields rose in Italy on Wednesday after a debt auction, which most analysts said went well.
"Italy stuck out a bit yesterday," DZ Bank Christian Lenk said. "At the auction everything went basically smoothly ... but it was just a normal auction. The market seems to be expecting fantastic results in a row, which is simply not sustainable."
"To really see the market continuing its bullishness you would need to see even better results. With elections looming, Italy is the first candidate for some jitters at some point."