* Bund futures, Spanish bond yields rise * Markets cheer 2013 budget * Bank stress tests, pending Moody's review still weigh By Marius Zaharia LONDON, Sept 28 (Reuters) - Spanish bond yields edged up on Friday, with uncertainty over looming bank stress tests and a rating review offsetting the impact of a 2013 budget that many see as an effort to pre-empt the likely terms of a bailout. Madrid announced a crisis budget on Thursday based on spending cuts rather than tax measures, increasing expectations that a rescue package is not far away. A bailout agreement would in all probability ease Spain's borrowing costs by activating the European Central Bank's new bond-buying programme. While the debt market cautiously welcomed the budget plans, lingering uncertainties about Spain meant demand for the country's high-yielding bonds remained subdued. An independent audit should reveal later on Friday the extent of the damage a collapsed property market has done to Spanish banks, and Moody's Investors Service is expected to complete its sovereign rating review by the end of the month. Spanish 10-year yields rose 7 basis points to 6.05 percent. They have traded in an uncomfortable 5.6-7.8 percent range throughout an extremely volatile third quarter that saw investors' mood shifting from concern the euro might break up to optimism the ECB can cure the bloc's debt pains. "It's still not over. We have the stress test results ... (and) a rating downgrade may cause some forced selling," ING rate strategist Alessandro Giansanti said. The Moody's review could push Spain's ratings below investment grade, into so-called "junk" territory. "HOSTAGE TO POLITICIANS" Question marks over the government's credibility also prevented Spanish bonds from rallying on Friday. Spain is expected to miss its 2012 budget deficit target and Prime Minister Mariano Rajoy is struggling domestically, with anti-austerity protests gaining momentum and separatist sentiment running high in the wealthy Catalonia region. "They're making the right noises, but whether they can actually put (the budget measures) in practice is a different matter in a country with no growth and 25 percent unemployment," one trader said. "I'm going to remain sceptical." Peter Allwright, head of absolute return on rates and currency at RWC Partners, said he was staying away from Spanish bond markets. His instinct was to short Spain, but the prospect of ECB bond-buying made him cautious about doing so. "You're hostage to politicians, which is very hard to trade on. If you trade on economics, they are uniformly bad," said Allwright, whose group manages assets worth $5 billion. "But also you don't try to fight central bankers until you know you can win." A bond auction next week will give more clues about investors' appetite for Spanish bonds. Safe-haven German Bund futures were 28 ticks higher at 141.85. Some 62 percent of the funds that responded to a Reuters poll said they planned further cuts to their German Bund holdings as a result of the ECB plans. But RWC Partners' Allwright expected Bunds to remain broadly supported even if the ECB started to buy Spanish bonds as major central banks are likely to keep their monetary policies relaxed for a prolonged period.

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