* Credit Suisse flags Bund resistance at 141.90-95
By Ana Nicolaci da Costa
LONDON, Oct 12 (Reuters) - Spanish bond yields fell on Friday, despite a downgrade to the country's credit rating this week, as the prospect of central bank intervention to support its debt made investors reluctant to sell.
Trading was quiet, with many investors sticking to the sidelines because they don't know when Spain may ask for a bailout, and in the absence of any other major news. An aid request is a prerequisite for European Central Bank bond-buying.
Even though Spain seems in no hurry to seek help, the prospect of a financial backstop has kept sovereign debt markets within tight ranges and has even made a rise in Spanish yields a buying opportunity for certain investors, analysts said.
"We have been in a Catch-22 situation," said Elwin de Groot, senior market economist at Rabobank.
Spain is only likely to seek aid if its borrowing costs increase further but any such rise is being limited by the prospect of ECB bond purchases, he explained.
"If you start selling the paper now and suddenly, within a few weeks, Spain says we are going to do it, the yields will drop back a lot so you actually miss this opportunity."
Ten-year Spanish bond yields fell 7 basis points to 5.71 percent. De Groot said only an event triggering a jump back towards 7 percent, the level at which other countries have requested aid, would be enough to push Spain to seek help.
Spain's borrowing costs over two years fell 7 bps to 3.20 percent.
Rating agency Standard & Poor's cut Spain on Wednesday to BBB-minus with a negative outlook, just one notch above junk grade and in line with peer Moody's, which is expected to conclude its own review of the country's rating soon.
"I think people maybe tried to go short yesterday after the S&P downgrade and are now taking back those positions," one trader said. "There seems to be buyers on dips at the moment in general in peripheral markets."
Italian bond yields also fell, with 10-year paper 2.8 bps lower at 5.00 percent and two-year yields down 7.5 bps at 2.40 percent.
RANGE-BOUND
German Bund futures rose 28 ticks to 141.43 but market players said trade was subdued.
"We are in a boring, low volume range ... No one is actually doing anything because everybody is waiting for news on Spain or Greece," a second trader said.
The German Bund future kept within the 140.70-141.95 range it has held over the last three weeks and showed no sign of breaking out soon, Credit Suisse technical analyst David Sneddon said.
"You are pretty much as sideways as you want to get it within the range. It only starts to get exciting above 141.90-95," he said, adding that was a big resistance level.
Disagreement among policymakers on how to handle the crisis is also fuelling demand for safe-haven debt, some analysts said.
In a softening of earlier positions, the International Monetary Fund has argued that forcing Greece and other debt-burdened countries in Europe to reduce their deficits too quickly is counter-productive because it hurts the economy.
The shift shows just how worried policymakers are about the euro zone's growth outlook. But Germany pushed back against that advice, saying that reversing course on promised deficit reductions would only weaken credibility.
"This is only a confirmation that at the global level policymakers differ on the way forward. You would expect that after a such long period of crisis, there (would be) more convergence in opinions," de Groot added.
