EURO GOVT-Demand for yield lifts euro debt, Portugal bucks trend
* Hunt for yield underpins Spanish and Italian debt
* Portugal's debt falls after court rejects some austerity
* German yields need fresh impetus to fall below 1.20 pct
LONDON, April 8 (Reuters) - Italian and Spanish borrowing costs fell on Monday as a hunt for returns continued to underpin high-yielding debt, while Portuguese funding costs rose after its constitutional court rejected some austerity measures.
Non-German euro zone debt was mostly higher, extending Friday's moves, when the prospect of interest from Japanese investors following the announcement of extraordinary stimulus steps by its central bank, lifted debt markets.
"Investors, not only in Europe, but across the globe are struggling to find pick-up or to find high-yielding assets, so this is supporting not only Spain and Italy but also the likes of Belgium and France and also the other semi-core countries," Michael Leister, senior interest rate strategist at Commerzbank said.
"What is noticeable is indeed this resilience towards the negative newsflow we had with regards to Portugal. We see quite a pronounced underperformance of Portuguese paper."
Portuguese yields rose 10 basis points to 6.53 percent with traders citing concerns over the country's ability to keep its bailout programme on track after a court overturned planned austerity measures worth 900 million euros.
The cost of insuring Portuguese debt against default rose 17 basis points to 430 bps.
Ten-year Spanish yields fell 6 bps to 4.72 percent and the Italian equivalent eased 10 bps to 4.31 percent, extending Friday's rally which was boosted by an influx of cash from Asia following the Bank of Japan's stimulus plans.
"Given everybody is in a search for yield mode naturally those (Spanish and Italian) markets have more upside then semi core markets whose yields have come down quite massively," the trader said.
French and Belgian borrowing costs touched fresh record lows, with higher-rated euro zone debt having particularly benefited on Friday from speculation Japanese investors would switch out of local government debt into euro zone bonds after the BoJ announcement.
French 10-year bond yields hit a record low at 1.71 percent and the Belgian equivalent at 1.928 percent.
German Bund futures were 7 ticks lower at 146.27, having risen on Friday to their highest since June 2012 after U.S. jobs data came in much lower than expected.
Gloomy economic fundamentals in the euro zone helped take 10-year German yields below 1.20 percent on Friday to their lowest levels since right before ECB President Mario Draghi promised to do whatever it takes to protect the euro in late July.
Ten-year German yields were last flat at 1.22 percent. Analysts say German Bunds are becoming expensive and need a fresh trigger to take them sustainably below the 1.20 percent level.
For Cyril Regnat, fixed income strategist, at Natixis the German debt rally is overdone.
He expected forward Euribor rates to fall because of excess liquidity and bets for a more accommodative ECB and short-dated German yields to stay put, widening the spread between the two.
"We have this floor at zero percent due to the ECB's reluctance to cut the deposit rate. While we are expecting a fall in forward Euribors, we believe that short-dated German bonds have no more upside potential," Regnat said.
"So we would be seller of two-year German bonds and we would receive swap simultaneously," he said. (Editing by Chris Pizzey, London MPG Desk, +44 (0)207 542-4441)