* Spain sells more than planned at bond auction
* ECB keeps interest rates unchanged at record lows
* Investors expect monetary easing signals from the ECB
By Marius Zaharia
LONDON, April 4 Spanish bonds rallied on Thursday after a strong debt auction in Madrid, while German Bunds were steady with investors reluctant to place fresh bets before a news conference by ECB President Mario Draghi.
The European Central Bank kept its refinancing rate unchanged at a 0.75 percent record low as expected, but the focus was on any hints about future moves that Draghi might offer in his post-meeting comments after 1230 GMT.
Spain sold more bonds than planned as investors bid heavily for the paper. Analysts said the backstop provided by the ECB's as-yet untested bond-buying programme had offset any worries about a potential fallout from the Cypriot crisis.
Spain was seen especially at risk from contagion from Cyprus due to its fragile banking system. Nicosia's bailout is the first to impose losses on bank depositors and many analysts had feared the move could trigger bank runs across the euro zone.
With no sign that was happening, however, investors jumped on the relatively high yields on offer in Spain.
Ten-year Spanish yields fell 8 basis points on the day to 4.85 percent, some 357 basis points over equivalent German yields - the euro zone's benchmark.
"The underlying situation has stabilised a bit with the Cyprus crisis getting better," said Gianluca Ziglio, executive director of fixed income research at Sunrise Brokers.
"There is still room for rallying in Spanish bonds, probably they could target 330-340 bps in terms of spreads."
Those levels represented the lower end of this year's roughly 60 bps range for Spanish/German 10-year yield spreads.
ING rate strategist Alessandro Giansanti saw 320 bps as the lower limit, saying improvements in Spanish budget and growth data were needed for the spread to shrink beyond that level.
Worries about Italy, which is still in search of a government after an election in February produced political deadlock, may also cap gains for Spanish bonds, analysts said.
Analysts said markets were expecting Draghi to open the door for future monetary policy easing moves. The focus will be on his expectations for how the economy will fare later this year.
"If he still signals that in the second half he expects a small recovery, Bunds will sell off," said Emile Cardon, market economist at Rabobank in Utrecht.
He added, though, that such a reaction may be limited and short-lived given that Bunds are seen as a safe haven and that investors are still worried about the potential ramifications of Cypriot's tough bailout and the uncertainty in Italy.
The euro zone economic decline continued in March, PMI surveys showed on Thursday, with analysts saying the data was supporting the case for further monetary easing.
Bund futures were last 15 ticks higher on the day at 145.67, while cash 10-year German yields were 1 bps lower at 1.27 percent. Cardon said he saw a near-term range of 1.20-1.40 percent for Bund yields, but added they were more likely to fall from current levels than rise.