* Bund yields break through 2 pct, but stay close to it
* U.S. data could push yields higher in the near term
* Euro zone hurdles to limit the rise in Bund yields
By Marius Zaharia
LONDON, March 16 (Reuters) - German 10-year government bond yields broke through the psychologically important 2 percent barrier on Friday but weak euro zone growth prospects and major debt concerns were expected to limit the scope for a further rise.
Improved faith in the United States' recovery momentum has triggered a sell-off in Treasuries, and Bunds followed suit, albeit with a lag as the euro zone faced bigger risks ahead.
Spain's poor fiscal performance remains a concern, bets that Portugal may have to restructure its debt are on the rise, and upcoming elections in Greece and France may delay the implementation of reforms to reduce debt and spur growth.
The benchmark 10-year German yield was last 5.6 basis points higher at 2.028 percent, some 30 bps lower than the U.S. T-note yield.
"The uncertainty in the euro zone will keep yields down," said Alan McQuaid, Bloxham Stockbrokers' chief economist, adding Bund yields may only rise about 20 basis points from current levels before coming back towards or even below 2 percent.
"I think the second quarter will see 'risk off' coming back in play on the political situation in Europe, particularly elections in France and Greece and the referendum (on new fiscal rules in Europe) in Ireland."
Bund futures were 71 ticks lower at 135.77. Futurestechs technical analyst Clive Lambert recommended investors stay on the sidelines and wait for a break below this year's low of 135.22 before turning more bearish on Bunds.
U.S. data such as inflation, the industrial output and the University of Michigan sentiment indicator could further fuel the sell-off in Bunds if they come in better than expected. Commerzbank strategists recommended investors to short Bunds in the run-up to the data releases, looking for Bund yields to establish a 2-2.2 percent range in coming weeks.
NOT GOING TOO FAR
That range looked likely to hold.
"We've seen a lot of good news ... and I find it a little bit difficult to see how much better the news flow can get," said Marius Daheim, senior fixed income analyst at Bayerische Landesbank, adding that the risk of fiscal slippages in the euro zone should keep Bund yields subdued.
Investec fixed income analyst Brian Barry said buying interest in Bunds will remain high as long as Spanish bonds remain under pressure.
Spanish debt has clearly underperformed its peers after the government said last month it missed its 2011 budget goal by a wide margin. Ten-year yields were stable at 5.19 percent, some 35 bps over their Italian equivalents.
Nomura's head of European rates strategy Nick Firoozye said Bund yields of 2 percent were a buying opportunity because "the European situation is vastly different from that of the U.S and the (European Central Bank's cash injections) have helped both the periphery and Bunds."
Based on that view, Firoozye recommends long positions in Bunds and short positions in U.S. T-notes. Citing similar supporting factors for Bunds, Rabobank rate strategist Richard McGuire said the U.S./German spread could widen to as much 48 bps, a level last seen in February 2011.
Others expect a short-term correction. Bayerische Landesbank's Daheim said the T-note/Bund yield spread could narrow to 20 or even 10 bps near-term, but still expected Bund yields to remain lower than T-note yields in the longer run.
