* Moody's expected to finish Spain rating review this week
By Marius Zaharia
LONDON, Sept 24 (Reuters) - Bund futures rose on Monday after a worse than expected German business sentiment survey and were likely to edge higher in the near term as Spain's reluctance to seek a bailout unnerves investors.
The weak Ifo survey added to concerns the euro zone's largest economy was struggling as a result of the debt crisis, weakening the euro currency and increasing the appeal of safe- haven assets such as Bunds.
Sources with knowledge of the matter have told Reuters the Spanish government has been working on a series of reforms to be included in the budget bill later this week that would form the basis of a future aid deal.
But Economy Minister Luis de Guindos said on Saturday his country would not rush to seek external help.
Seeking aid through the euro zone's rescue funds could allow the European Central Bank to buy Spanish bonds In the secondary market, lowering Madrid's borrowing costs. However, these costs have fallen sharply since the ECB plan was unveiled, reducing the immediate pressure on Spain to ask for help.
European officials also said they did not expect Spain to seek an assistance programme before a regional election in the Galicia region on Oct. 21. Paymaster Germany said on Friday that Spain did not need a European bailout.
"There is still a lot of uncertainty with regards to the situation in Spain. The newsflow there is not really conclusive ... so in the very near-term we are in a 'risk off' mode," said Elwin de Groot, senior market economist at Rabobank.
Bund futures were last 28 ticks higher on the day at 140.28. One trader said the lack of guidance from Spain on the timing of a future bailout may see futures testing the top of their recent 139.5-140.5 range.
But it looked unlikely they would stray too far outside that range without better insight into Spain's plans.
"Ultimately if it looks likely that they will reach an agreement over a bailout it make sense for the markets to hang in there," said Chris Scicluna, head of economic research at Daiwa Capital Markets, adding that the details of the 2013 budget draft to be published on Thursday will be key.
"Any policy announcement this week that would be consistent with the kind of conditionality that would be demanded anyway is likely to be a further step towards the signature of the deal."
DOWNGRADE THREAT
Spanish government bond yields inched lower on Monday, with investors choosing for now to express their concerns about the uncertainty in Spain in the more liquid safe haven German debt market.
A wrong bet on Spanish debt would be more costly as it would take more time to close a position in the thin Spanish market, which is dominated by domestic investors.
"It's a volumes problem in Spain, and the outlook is so binary that you'd rather stay out or stay neutral," another trader said.
The threat of a possible downgrade of Spain's credit rating into junk territory by Moody's Investors Service later this week also hangs over Madrid.
"That could contribute to the slight risk-off mood in the near term," Rabobank's de Groot said.
"But (sentiment) could change very quickly if they come up with a budget that includes structural measures because that would be a sign that they are preparing for a bailout request."
As the other two rating agencies still rate Spain in investment grade territory and a lot of the debt is domestically owned, the risk of a strong sell-off after a downgrade is limited, analysts said.
