* Spanish bonds outperform
* 10-year yield edges closer to negative territory
* Political uncertainty adds to worries about economic data (Updates with move in inflation expectations, reaction to Trump trade comment)
By Yoruk Bahceli
LONDON, Sept 25 (Reuters) - Political risk and economic recession fears supported euro zone bonds on Wednesday, with Spanish debt in high demand thanks to higher yields over top-rated peers and a recent credit rating upgrade.
Euro zone bond yields have fallen this week as an impeachment inquiry into U.S. President Donald Trump and concerns about Brexit added to investor worries about poor economic data, especially from Germany.
They are at their lowest since Sept. 12, when the European Central Bank unleashed a fresh wave of stimulus measures in an attempt to boost economic growth and inflation.
Spain has been the outperformer, however, its 10-year yield falling 16 basis points so far this week, compared to 9 bps for the euro zone’s benchmark bond issuer Germany. The gap between the two narrowed 4 bps to 70 bps this week.
Spanish debt has been buoyed by Friday’s rating upgrade to ‘A’ by S&P Global. That has alleviated some of the concern around politics as the country prepares for its fourth general election in four years.
“The political situation has been the same for four years but this has not derailed the economic success story,” said Antoine Bouvet, senior rates strategist at ING.
Spain’s 10-year bond yield fell as much as 3.4 basis points to 0.09%, edging closer to negative territory. It pulled back slightly in late trade to 0.1%.
“The broader environment of hunt for yield and investors taking on credit risk is a bigger factor, while the rating upgrade might have allowed investors to jump in and buy Spain,” said Mizuho rates strategist Peter McCallum.
Despite the plunge in yields this year, Spanish bonds still offer higher yields than the majority of euro zone government bonds, nearly 70% of which traded with negative yields in August.
McCallum predicted that, should the 10-year Bund fall to Mizuho’s fair value level at -0.75% from -0.61% currently, Spain’s 10-year yield would turn negative.
Most 10-year euro zone bonds yields rose in late trade following a comment from U.S. President Donald Trump that a trade deal with China could happen sooner than expected.
Germany’s 10-year Bund yield was up 2 bps at -0.58% .
Still, analysts said plenty of economic and political risks kept a lid on any yield rises.
Democrats in the U.S. House of Representatives launched an impeachment inquiry into Trump, while the British parliament reconvened after the UK Supreme Court decided the decision to suspend it for five weeks was unlawful.
Weak PMI data this week meanwhile has fuelled recession worries, pushing a key market gauge of euro zone inflation expectations to a three-week low below 1.2% and flattening the German bond yield curve further.
The gap between short and long-dated German government bonds yields fell below 10 bps for the first time since 2008.
Reporting by Yoruk Bahceli; Additional reporting by Dhara Ranasinghe; Editing by Susan Fenton