Easing Syria crisis, firm data hoist German yields
* Bunds fall as delayed Syria strike lifts equities
* German 10-year yields near 1-1/2 highs
* Upbeat European PMIs help demand for lower-rated debt
* Spanish bonds outperform on strong domestic buying
By Emelia Sithole-Matarise and Ana Nicolaci da Costa
LONDON, Sept 2 (Reuters) - German bond yields rose on Monday as riskier assets drew comfort from U.S. President Barack Obama's decision to put off any military action against Syria until after consulting Congress.
Data showing China and much of Europe's manufacturing sectors grew in August also cooled demand for lower-risk government bonds to the benefit of equities and higher-yielding euro zone debt.
Obama's decision on Saturday to seek congressional authorisation is likely to delay for at least nine days any attacks on Syria, the threat of which had driven investors to seek safety in top-rated government debt like Bunds.
"When it looked like something was imminent in Syria we had risk assets under pressure. That seems to have receded somewhat with the U.S. taking a step back and that's certainly made core bonds slip a bit," said Philip Tyson, a rate strategist at ICAP.
"We also had PMI data today which has been encouraging and that helped risk sentiment."
Ten-year German bond yields rose 5 basis points to 1.90 percent, not far from 1-1/2 year highs of 1.98 percent hit in August.
German Bund futures fell 56 ticks to settle at 140.10 in subdued trading due to the U.S. Labor Day holiday, reversing some of last week's gains.
ECB MEETING EYED
Analysts said investors could be positioning for the European Central Bank's monetary policy meeting this week, where President Mario Draghi will have to balance the recent improvement in economic data with a rise in market yields, which some worry could blunt the recovery.
Money market rates have risen even though the ECB expects interest rates to remain low for an extended period of time, but the central bank is not expected to take any new steps to limit them from rising closer to the refinancing rate, a Reuters poll of euro traders showed on Monday.
Bond yields have also been rising in anticipation that the U.S. Federal Reserve will start trimming its monetary stimulus this month. U.S. economic reports, particularly the labour market figures on Friday, could confirm those expectations.
Spanish debt outperformed peripheral euro zone peers with traders citing strong domestic buying across the curve except in the October 2018 and October 2023 bonds Madrid will auction on Thursday.
Madrid aims to sell up to 4 billion euros of the bonds with investors seen snapping them up as a high-yielding alternative to debt issued by Italy whose political ups and downs have made investors edgy.
Ten-year Spanish government bond yields were 10 bps lower at 4.44 percent, cutting their yield premium over Italian peers to 8 bps, almost half of where they were in late Friday trade.
"Obviously we had very good PMI data coming out of both these countries and that's underpinning both bond markets but in Spain there was a big domestic buying campaign going on this morning across the curve," one trader said.
Ten-year Portuguese yields were 7 bps lower at 6.76 percent, having risen sharply on Friday after the country's constitutional court rejected a labour bill and dealt a blow to the austerity programme set out under Lisbon's bailout.
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