German yields fall to one-month lows on Fed stimulus surprise
* German yields fall to one-month low on Fed decision
* Rally in riskier assets supports Spanish debt sale
* Portuguese bonds lag after S&P rating warning
LONDON, Sept 19 (Reuters) - German bond yields fell to their lowest in a month on Thursday and euro zone bonds rallied across the credit spectrum after the U.S. Federal Reserve surprised markets by keeping its monetary stimulus unchanged - at least for now.
Riskier assets also rose a day after the Fed opted not to trim its $85 billion a month bond-buying programme, citing strains in the economy from tight fiscal policy.
Bond yields and euro money market rates had been pushed higher in recent weeks as markets priced in the fact that the Fed could begin slowing its bond purchases as early as September, after flagging its intention to do so in May.
"It's a pretty constructive environment for bonds. The Fed was clearly much more dovish than anybody expected," Philip Tyson, strategist at ICAP said.
"Having said all that ... things could become much more choppy and volatile generally for bonds in the coming weeks. Because clearly a lot of the communication and transparency of the Fed has been compromised in many ways, people just don't know quite how to gauge it."
The Bund future was up 84 ticks at a settlement close of 138.56. Cash German 10-year yields were down 7.6 basis points at 1.88 percent, having dropped to 1.81 percent earlier, the lowest since mid-August 2013.
The gains in safe-haven bonds came even as U.S. data was upbeat. U.S. home resales surged in August to a 6-1/2 year high, and factory activity in the U.S. mid-Atlantic region soared to a 2-1/2-year high in September.
"Overall, we still think tapering will still come. Going into the fourth quarter we think (U.S.) data will stabilise again triggering tapering concerns," Commerzbank strategist Michael Leister said.
"We therefore recommend using these episodes of strength in Treasuries and Bunds to reduce duration."
PORTUGAL LAGS UPBEAT PERIPHERY
Riskier assets also got a lift from the Fed's decision.
Italian yields fell 10 bps to 4.29 percent and the Spanish equivalent eased 7 bps to 4.33 percent , as a 3.1 billion euro sale of 3- and 15-year bonds also attracted solid demand.
Italian bonds have clawed back some ground versus their Spanish counterparts in recent days, after Italian yields overtook Spanish ones for the first time in 18 months last week due to political uncertainty.
Supporters of Silvio Berlusconi have threatened to bring down the government if a Senate committee expelled him from parliament for after a tax fraud conviction.
Berlusconi, in a video message late on Wednesday shortly before a Senate committee took a first step towards expelling him, vowed to stay at the centre of Italian politics but refrained from repeating threats to topple the government.
Leister at Commerzbank said Italian yields could trade back above Spain's in coming days on lingering political uncertainty and concern about its ability to meet fiscal targets.
"Even if Berlusconi is expelled from the Senate and the government stays together the coalition will remain fragile which renders BTPs prone to political risk," Leister said.
Ten-year Irish yields fell 11 bps to 3.90 percent as data showed the country emerged from its second recession in five years in the second quarter.
Portuguese bonds lagged their periphery peers, one day after Standard & Poor's warned it could downgrade the country's credit rating. It cited constitutional court challenges to spending cuts and doubts about Lisbon's return to markets.
Ten-year yields were flat at 7.21 percent.