EURO GOVT-Bid for safety helps Bunds rally into weekend
* U.S. data, Cyprus concerns push German Bunds higher
* Semi-core rally seen stalling awaiting Japan inflows
By William James and Emelia Sithole-Matarise
LONDON, April 12 (Reuters) - Demand for less risky assets helped German Bunds rally on Friday as bail-out candidate Cyprus's plight unnerved investors and economic data showed the outlook for the U.S. economy darkening.
Although finance ministers backed a 10 billion euro bailout package for Cyprus, yields fell on highly-rated euro zone bonds issued by the likes of Germany, the Netherlands and France as investors backed away from riskier assets.
The bailout deal is now ready to be approved by individual member states, but investors' recent buoyant mood was tempered by the stark reminder that the region's 3 1/2-year-old debt crisis remains unresolved.
"We're having a risk-off day. There's been an overhang because of Cyprus all day long... markets are getting a little bit sceptical that these things are never quite as plain sailing as first though," said Marc Ostwald, strategist at Monument Securities in London.
Cyprus will have to contribute 13 billion euros, almost twice the original estimate, though EU Economic Affairs Commissioner Olli Rehn insisted on Friday the two figures were not directly comparable.
However, the sweeping steps needed to raise that cash have stoked concerns that the Cypriot economy will continue to struggle and ultimately need more cash.
The Bund future was 63 ticks up on the day at 145.88, with German 10-year yields 5 basis points down at 1.258 percent, leaving it just 6 basis points from eight-month lows hit last week.
Bund futures extended losses after U.S. retail sales data came in weaker than expected and a consumer sentiment reading fell to the lowest since July 2012. The latest in a series of poor data reports added weight to the view that the recovery in the world's largest economy was flagging.
"The rally is now being driven by the U.S., and Bund and other core markets are benefiting from that to an extent," said Patrick Jacq, strategist at BNP Paribas in Paris.
LOOKING TO JAPAN
Analysts raised questions over how much further the rally seen across most of the euro zone's sovereign bonds this week could go. Yields on Belgian, French and other country's bonds have hit record lows on speculation that a huge injection of cash by the Bank of Japan could spill over into the euro zone.
But the rally had been driven more by domestic players looking to buy in anticipation of the inflow of Japanese cash. Market participants were waiting for hard data to show Japanese investors buying up euro zone bonds.
"There's been no follow-through in terms of the flow out of Japan so people are questioning now the impact the BOJ policy may have so we are taking back a little bit of the hype out of the market and we may see yields go up a bit," said Alessandro Tentori, global head of rates strategy at Citi.
Although anticipation of flows from Japan into the currency bloc also benefited lower-rated bonds, some analysts are sceptical they will actually switch from their domestic bonds into riskier paper from, for example, heavily-indebted Italy, struggling to form a government after February elections.
"When it comes to the banks and pension funds it's unlikely that they will all of a sudden go into Spain and Italy. France is likely to remain one of the favourites," Tentori said.
Ten-year Italian bonds recovered from an early selloff to stand flat on the day at a yield of 4.33 percent, while equivalent Spanish bond yields were 3 basis points higher at 4.7 percent.