* Bunds rise as strong demand for safe-haven assets persists
* Spain, Italy worries to continue ahead of Sept. ESM ruling
* U.S. data to set tone into Federal Reserve policy report
By William James
LONDON, July 16 (Reuters) - German Bund futures rose on Monday, building on last week's rally as the euro zone's debt crisis continued to support flows into the region's top-rated, highly-liquid bonds with technical charts signalling more gains to come.
German debt remains the investment of choice for those seeking shelter as yields rise on bonds issued by Spain and Italy, both battling to retain market confidence that they can keep financing their debts while reining in deficits.
Bund futures rose 12 ticks to 144.84, with trading expected to remain light and price action choppy throughout the day. Last week, total traded volume in the Bund future was its lowest since early May as activity slowed down over the summer.
On Friday, Italy's credit rating was cut by two notches on fears over the liquidity of its debt market and in expectation that already-weak economic conditions would worsen.
"Spanish and Italian speculation remains at the fore. To me sentiment still feels fragile... we're just waiting for the next development there," a trader said.
Spain is scheduled later today to announce how much it will look to raise at a bond sale on Thursday. The auction was expected to push Spanish yields higher as dealers sell existing debt to make way for the new issues into a market where demand is almost entirely reliant on domestic banks.
Spanish 10-year bond yields were 8 basis points higher on the day at 6.74 percent but traders reported that few bonds were changing hands, resulting in exaggerated price movements. The cost of insuring Spain's debt against default also rose modestly, up 7 bps at 559 bps, according to data provider Markit.
Confidence in the ability of the euro zone's rescue plans to shore up Spanish and Italian markets was set to remain shaky over the next few weeks after Germany's top court set a Sept 12 deadline for a decision over whether it would block the latest version of the fund.
That means the fund will not any time soon be using the new powers granted to it by euro zone leaders last month in the hope it could stave off collapse for Italy and Spain.
"That's not great news as it just increases the uncertainty and effectively prevents the ESM (European Stability Mechanism)from being where it should be," said Eric Wand, strategist at Lloyds Bank in London.
"But, I think after last week, when they said they needed further time, the market kind of understood it wouldn't happen this side of the summer break."
U.S. retail sales data could provide the market with some momentum later in the session as investors look to gauge the strength of the world's largest economy.
The data may influence expectations headed into Federal Reserve chairman Ben Bernanke's biannual testimony to the U.S. Congress on the economy on Tuesday and Wednesday, as markets await signals on whether the Fed will undertake new stimulus measures.
Analysts said that if Bernanke sounded less keen than expected on the prospect of renewed bond-buying, equity markets were likely to suffer, providing another boost for low-risk government bonds.
Technical analysis also pointed to a continued rise in the price of German debt futures.
"There is no evidence of any bearish reversal patterns forming and the risk remains skewed to the upside," said UBS technical analyst Richard Adcock.
"A break above the 145.16 high will be the next bullish trigger, opening the door back to the 145.52 June 1 extreme and potentially further over the longer term."