* Markets more confident Greece will receive aid money
* Spain to issue 2.5-3.5 billion euros of bonds
* Spanish yields fall as auction seen going smoothly
By Marius Zaharia
LONDON, Nov 22 (Reuters) - Spanish bond yields edged lower on Thursday before a debt auction that was expected to go smoothly due to growing confidence Greece would secure fresh bailout funds.
German Chancellor Angela Merkel engendered some optimism in the market on Wednesday by saying an agreement to release aid to Athens was possible next Monday when euro ministers meet.
Greece's international lenders failed to reach a deal on Wednesday.
Expectations that Spain will eventually request aid, enabling the European Central Bank to buy its short-term bonds via its Outright Monetary Transaction (OMT) programme, provided a favourable backdrop for high-yielding euro zone debt.
Ten-year Spanish yields were 6 basis points lower on the day at 5.67 percent, having traded above 6 percent at the start of the week.
"There's a general feeling that euro zone politicians have got to come up with some agreement on Greece ... Today is probably going to be a bit of a 'risk on' day," Rabobank rate strategist Lyn Graham-Taylor said.
"Spain issues a small amount. The longer bonds look like they've been opened due to specific dealer demand, the shorter one will be supported because it falls into the OMT window."
Spain will sell 2.5-3.5 billion euros of three-, five- and nine-year bonds later on Thursday. The funds raised would begin covering financing needs for 2013 as Madrid tries to cash in on expectations of eventual ECB support.
An increase in appetite for riskier assets this week is expected to offset potential drags on foreign demand at the auction, such as low liquidity due to the U.S. Thanksgiving holiday and a recent drop in yields in secondary markets.
"The periphery has traded well this week, the backdrop (for the auction) seems OK," one trader said. "I don't think we're too concerned. The fact that (Spanish bonds) have rallied massively into the auction is the only caveat."
German Bund futures were eight ticks lower at 142.09, having fallen by 83 ticks in the previous two sessions. Charts pointed to further losses for Bunds in the near future as they broke below their 100-day moving average at 142.34.
UBS technical analyst Richard Adcock recommended investors bet on a fall towards 141.50, just above the mid-point of the October-November rise.
German 10-year yields were a tad higher at 1.439 percent, with Commerzbank strategists expecting them to rise towards 1.50 percent in coming days.