EURO GOVT-Calmer stock markets lift Spain, Italy debt
* Lower-rated debt recovers after sharp sell-off
* Concern over Fed outlook keeps traders wary
* Higher yields help demand at German debt sale
LONDON, June 12 (Reuters) - Spanish, Italian and other lower-rated euro zone bond prices rose on Wednesday as riskier assets stabilised after a recent sell-off on concerns central bank stimulus could be cut back.
Euro zone bonds have fallen broadly in recent weeks as concern the U.S. Federal Reserve could soon slow its bond purchases keeps investors on edge.
Those worries were compounded on Tuesday after the Bank of Japan disappointed investors who had expected new measures to calm volatility in Japanese bonds. Trading was seen remaining choppy until there's clarity on the Fed outlook.
"Yesterday everybody was panic-selling and today that selling has abated, sentiment is more positive and people are covering short positions," a trader said.
"Prices are purely driven by positioning at the moment."
Spanish 10-year yields dropped 12 bps to 4.54 percent, Italian yields fell 8 bps to 4.28 percent and Portuguese were down 18 bps to 6.30 percent.
Investors kept an eye on a hearing in Germany's top court into the legality of the ECB's untested bond-buying scheme, the OMT, which has defused the region's debt crisis.
The court is not expected to rule until after German elections in September, but market participants are sensitive to any comments that may hint at future curbs on the scheme.
"While a verdict won't be cast for months, the deliberation casts doubts about the effectiveness of the OMT," Commerzbank strategists said in a note.
Italy underperformed Spain as traders made way for a sale of up to 4 billion euros of three- and 15-year bonds on Thursday at which Rome is expected to pay higher borrowing costs as investors fret over the future of global economic stimulus.
Italy's one-year debt costs rose at auction for the first time in three months on Wednesday. 1/2ID:nL5N0EO1B1 3/8
Some investors still saw opportunity in the peripheral euro zone market, especially in Italian debt.
"We have been a holder of Italy for 18 months and we think on the long-term fundamentals they are doing the right things, making the right noises," said David Zahn, head of European Fixed Income at fund manager Franklin Templeton.
"I still think there is some scope for further performance despite the wobble we have seen."
In core markets, German Bunds edged up after a sale of 4.04 billion euros of two-year bonds met healthy demand as the recent sharp rise in yields helped lure investors. Some 17 billion euro in German debt redemptions this week lent further support.
German two-year yields have risen nearly 10 bps to their highest since early February, around 0.24 percent, since Thursday when European Central Bank President Mario Draghi doused bets that further monetary easing was imminent.
The Bund future was 9 ticks up at 142.83 with 10-year yields 0.7 bps down at 1.55 percent.