* Spanish and Italian yields stabilise after Monday selloff * Outlook to remain volatile as political risks rise * Safety bid for Bunds eases on peripheral recovery and data By William James and Ana Nicolaci da Costa LONDON, Feb 5 Spanish and Italian bonds inched up on Tuesday after a steep selloff in the previous session, with the near-term outlook for both countries expected to be volatile as political risks rise. Their yields edged lower as markets took stock of corruption allegations putting pressure on Spanish premier Mariano Rajoy and growing uncertainty over how upcoming elections in Italy might pan out. Spanish 10-year yields fell 3 bps to 5.41 percent and Italian yields were down 4.3 bps at 4.44 percent. Both had risen 20 basis points on Monday. "The market was simply waiting for some kind of catalyst to switch to a risk-off mood and take some of the profits that had accumulated in January when we saw a very bullish tone in the market," said Christian Lenk, strategist at DZ Bank. The modest rebound from Monday's selling indicated that the underlying positive mood towards riskier debt was unlikely to dissipate yet, but trading could be more volatile in coming weeks. Barclays Capital analysis on Spain, using proprietary and central bank data, showed that foreign investors who deserted the Spanish market last year had returned and much of the betting against Madrid had been scaled back. "The broad stabilization over the past month, coupled with renewed bouts of limited pressure, are likely to be the 'new normal' for the coming months at least," the bank said. RELATIVE PLAY The improved performance in peripheral debt eased demand for the safety and liquidity of German debt. Bund futures slipped nearly half a point to 142.18 - wiping out much of the gains made on Monday. Better-than-expected euro zone data also eased pressure with a business activity survey showing that the region is probably recovering, albeit driven in large part by Germany. Later in the session, investors will look at data from the U.S. services sector to gauge the Federal Reserve's monetary policy outlook after recent releases have painted a mostly upbeat picture of the world's largest economy. "At the moment, I think there is a kind of decoupling between the U.S. and Europe and therefore I think the Bund can outperform Treasuries," BNP Paribas strategist Patrick Jacq said. "This has to do with the economic situation in the U.S. and also the fact that risks are re-emerging in Europe. This is offering Bunds stronger support and therefore it makes sense to see an outperformance." The yield spread between 10-year U.S. Treasuries and the German equivalent stood at 34 basis points, little changed from the previous session but wider than the 29 bps in late European trading on Friday.