* Bunds rally after downbeat Ifo, euro zone PMIs
* Germany sells 3.3 bln euros of 10-yr bonds, demand good
* Spanish yields rise on aid request timing doubts
LONDON, Oct 24 (Reuters) - German government bonds rose on Wednesday as data showed the economic downturn in the euro zone appeared to be deepening, with souring risk appetite spurring demand at a 10-year Bund auction. Businesses in the region suffered their worst month in October since the bloc emerged from its last recession more than three years ago, surveys showed, while Germany's Ifo economic research Institute said the country's business climate worsened in October. Bund futures reversed their early losses after the data in a cautious market. Sentiment towards the region's peripheral issuers deteriorated on Tuesday after Moody's cut the credit ratings of five Spanish regions, pushing bond yields higher, with questions remaining over when Madrid would ask for a bailout. ``Now the Galician elections are out of the way, it's possible the markets may react to the ongoing uncertainty as to when Spain may ask for a bailout,'' said Rabobank rate strategist Richard McGuire. ``The path of least resistance then may be for higher Spanish yields and risk-off to remain in the ascendancy.'' Spanish Prime Minister Mariano Rajoy had not been expected to ask for aid - something that would clear the way for the European Central Bank to buy the country's bonds - before the elections in his home region last weekend, which his party won. Spanish bond yields had drifted lower and safe-haven German Bunds sold off, with the market seemingly prepared to wait for Rajoy to make his move. But Spain's 10-year yields have risen around 25 basis points this week and were last one basis points up on the day at 5.65 percent. ``The Spanish situation is just getting annoying now,'' one trader said. ``If Rajoy backs away from a bailout, then the market will push yields higher but with the (ECB bond buying programme) in place it makes it very hard to trade to the short side at the front end of the curve,'' a second trader said, referring to placing bets shorter-dated bonds would fall in price. The first trader said there had been some profit taking by domestic banks in both Spain and Italy's shorter-dated bonds after some yields touched multi-month lows last week. ``But some of the big funds are still buying so they're not down and out yet, and we increasingly feel it's increasingly different case in Spain and Italy,'' he said.
BUNDS IN DEMAND The shift in sentiment boosted demand for German safe-haven paper with the higher yields now on offer helping the sale of 3.3 billion euros of September 2022 bonds. The result contrasted with the last two 10-year auctions in September which failed to attract enough bids to cover the amount on offer. ``It's a good auction...and was helped by the risk-off sentiment over the last few days,'' said Nomura rate strategist Artis Frankovics. December Bund futures hit a session high of 140.64 and were last 11 ticks higher at 140.46, having tested an important technical resistance level. Technical analysts said they still saw room for further selling unless the futures contract could rise above the gap left on price charts at last Wednesday's open. Typically, market players will try to drive prices to fill these chart gaps. ``Only if prices were to go beyond the price gap that has recently opened up at 140.59 to 140.63 would potential be created as far as the July downtrend at 141.79 and the September/October highs at 141.90-95,'' technical analysts at Helaba Landesbank Hessen-Thuringen said. Benchmark 10-year German bond yields were 2 basis points lower at 1.56 percent.