* Weak German, French PMI data pushes Bunds out of range
* Italian yields edge up before election, investors cautious
* Spanish spread over Italy tightens
By William James
LONDON, Feb 21 German Bund futures hit a four-week high on Thursday after euro zone private sector activity data came in weaker than expected, prompting investors to flock towards low-risk assets.
Investors looking for signs that the euro zone was emerging from recession were left disappointed by business activity data showing the economic downturn in the region unexpectedly worsened in February.
That helped to push Bund futures 91 ticks higher to 143.33, building on early gains made when equity markets in Europe fell on U.S. Federal Reserve minutes showing its appetite for bond-buying stimulus may be waning.
The Bund future breached the top of its recent trading range and hit its highest since Jan. 25, with traders citing automated buying at the Feb. 11 high of 143.11 after the purchasing managers' index data. By midday, Bunds were trading at 143.13.
Analysts said the cautious tone underlying markets in the run-up to Italy's Feb. 24-25 election had made investors more sensitive to weak data.
"Taking into account the recent momentum that has been building up, the market is more prepared to look at the downside, in the PMI data especially," said Christian Lenk, strategist at DZ Bank.
"Investors are becoming more and more cautious ahead of the weekend ... People decided here to pull the trigger and go risk-off."
However, the impact on peripheral bonds was limited, with Italian 10-year yields rising 6 basis points on the day to 4.48 percent, but remaining well below peaks of 4.64 percent seen earlier this month.
The risk of the Italian vote producing a fragmented parliament with limited ability to pursue reforms has been balanced by the market's belief that the European Central Bank remains an effective buyer of last resort.
That has calmed nerves, ensuring most selling by investors worried about the election outcome has been met by buyers who have faith in the central bank backstop.
Spain cashed in on investors appetite for higher-yielding peripheral bonds, raising an above-target 4.2 billion euros at auction just a day after the country issued its first dollar bond since 2009.
"That was a very good auction in pretty much every aspect ... It's been a long time since the big skew has been towards the 10-year in distribution terms," said Marc Ostwald, strategist at Monument Securities, referring to the large amount of 10-year paper sold relative to less risky, shorter issues also on offer.
Spanish bond yields have pulled back somewhat after rising in early February when a political scandal brought calls for Prime Minister Mariano Rajoy to resign. Since then, Spain has outperformed Italy, leaving the spread between the two at its narrowest since early November.
Ten-year Spanish yields were last flat on the day at 5.20 percent, wiping out an early rise as markets welcomed the auction result.
France shrugged off the disappointment of its weak PMI data, producing a solid set of auctions that raised more than 10 billion euros. Ten-year French yields were slightly lower on the day, down 3 bps at 2.26 percent.