Cheapened German Bunds lure back buyers
* German 10-year yields retreat from 1-1/2-year highs
* Investors cover short positions
* Italian yields rise at auction
* Italian debt continues to lag Spanish bonds
By Emelia Sithole-Matarise and Ana Nicolaci da Costa
LONDON, Sept 12 (Reuters) - German Bunds pushed higher on Thursday as investors bought back into a cheapened market after a slew of debt sales from higher-rated sovereign issuers.
Bunds tracked U.S. Treasuries higher after a 10-year Treasury note sale drew strong demand the previous day and the completion of big corporate debt sales - including a record-breaking deal by Verizon Communications Inc.
In the euro zone this week, Germany, Belgium and the Netherlands sold a total of 11 billion euros ($15 billion) of bonds, which were smoothly absorbed.
Comments by European Central Bank President Mario Draghi reiterating that the economic recovery in the euro zone was still "very, very green" and that short-term money market rates were unwarranted also underpinned demand for Bunds.
German Bunds jumped 68 ticks to settle at 137.78 with traders saying some investors were also scrambling to cover positions after the market's recent sharp selloff spurred by expectations the Federal Reserve would soon cut back its efforts to boost the economy by buying bonds.
Cash 10-year German yields were down 5 basis points at 1.95 percent. They hit a 1-1/2 year high on Friday at 2.059 percent but have struggled to get much above 2 percent in recent sessions.
"A lot of duration hit the market over the early part of the week and now that's out of the way there's a bit of consensus that the market can rally a little bit into the Federal Reserve meeting next week," a trader said.
"People are a little bit short the market so maybe the Bunds are ripe for a little bounce and that's what we are seeing today."
In lower-rated bonds, Italian yields edged up as Rome paid more to raise funds at auction, highlighting investor concerns about a political crisis that some worry could stall efforts to revive the economy and contain debt levels.
Italy sold the maximum planned amount of 7.5 billion euros and demand for its three-year bond was higher than at an auction of similar paper in July. But its cost of borrowing over three years was the highest in nearly a year, reflecting the political tensions.
"In general, the auction was decent but not very strong given the cheapening of the Italian paper both versus the curve and versus other periphery (debt) like Spain," said Annalisa Piazza, market economist at Newedge. "Market players are still sceptical on the political situation."
Italian 10-year yields were up 1.5 basis points at 4.54 percent, underperforming many euro zone counterparts including Germany and Spain.
The premium offered by 10-year Italian bonds versus German debt widened 8 basis points to 260 basis points.
The Italian/Spanish equivalent rose as far as 7 basis points as Italian bonds continued to lag their Spanish counterparts.
Italy's underperformance also reflects concerns over the country's economic outlook. Italian industrial output was much weaker than expected in July, data showed on Thursday, dousing hopes that the country might emerge from its longest post-war recession in the third quarter.
The ECB warned of increasing risks surrounding Italy's 2013 deficit target - a view the country's welfare minister said was shared by the Italian government.
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