* Spanish yields higher after ministers say aid not needed
* Bunds edge lower, mark time waiting for Spain
* The Netherlands sells 5-year bonds
By Kirsten Donovan
LONDON, Oct 9 Spanish government bond yields edged up on Tuesday after euro zone ministers said it did not need a bailout yet, adding to concern that Madrid is set to dither too long before asking for more aid.
German government bonds also dipped in choppy trade after officials meeting in Luxembourg said Spain was taking steps to overhaul its economy and was funding itself successfully in financial markets, dashing hopes for a swift move to end the debt problems of the euro zone's fourth largest economy .
Investors expect that Madrid will ultimately have little choice but to ask euro zone authorities to start buying its debt on markets. But while there are no signs of that being imminent, bonds of both Germany and Spain are likely to trade around current levels.
"I think volatility will continue to drift lower while we wait for something from Spain," one trader said.
"We'll probably stay in this status quo and then it will all come down to them to decide what they will do."
The International Monetary Fund said in its latest round of global reports that Spain will miss its deficit targets this year and next and debt will jump to more than 90 percent of gross domestic product in 2013 as the country recapitalises its banking sector.
"It's difficult to envisage a scenario where Spain doesn't ask for a bailout...the dominant market discount is that some form of bailout is agreed over the next number of weeks," said ING's head of investment grade strategy Padhraic Garvey.
"There's no panic, the market is not necessarily going to punish Spain on a whim."
Spanish government bond yields have settled far below their July highs of over 7.5 percent. Ten-year yields were 4.5 basis points higher on the day at 5.78 percent.
"At 10-year yields comfortably below 6 percent, the Spanish government remains loath to compromise on conditions, hoping that a rating affirmation by Moody's this month will buy more time," Commerzbank strategists said in a note.
German Bunds remained locked in a range with futures bouncing broadly between 141.00 and 142.00 in recent sessions.
"I can't see us moving far from that until we get something more concrete on Spain," a trader said.
"People aren't carrying huge amounts of risk and there's still buying of dips in Bunds...the periphery has done well and we're seeing some of the (fast money) take profits there and move back to the core," he added, referring to accounts such as hedge funds who take short-term positions in the markets.
Bund futures were 16 ticks lower at 141.23, having earlier risen as high as 141.57. Ten-year cash yields were up almost two basis points at 1.49 percent.
UBS technical analysts Richard Adcock said a break below 140.60 - the 38 percent retracement of September's rally would risk a further sell-off in the futures contract to 139.76 and the Sept. 17 low at 138.41, the bank's target level.
The Netherlands kicked off the week's bond auctions, selling 2.26 billion euros of 2018 bonds.
"The paper was easily absorbed today," said Annalisa Piazza, market economist at Newedge Strategy.
Analysts cited the paper's relative cheapness when compared with other Dutch bonds of similar maturities, combined with the country being close to wrapping up its 2012 issuance with just two more auctions scheduled.
"The lack of near-future supply for the Jan-18 (bond)is also a supportive factor for the paper going forward," Piazza said.
Germany will test appetite for its 5-year bonds on Wednesday with Italy coming to market with up to 6 billion euros of BTPs on Thursday .