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* Debut EFSF 5-year issue heavily oversubscribed - sources
* Demand nearly nine times the 5 billion euros on offer
* Funds to be used to finance bail out of Ireland
By Luke Baker
BRUSSELS, Jan 25 (Reuters) - The European Financial Stability Facility, the 440 billion euro fund being used to bail out Ireland, launched its debut bond issue on Tuesday with demand dwarfing the 5 billion euros on offer.
The EFSF is AAA-rated and was always expected to attract strong interest for the near 16 billion euros it is expected to issue in 2011.
A source at the EFSF said it closed the order book with demand at 43 billion euros, nearly nine times the 5 billion euros of paper on offer -- a sign of confidence in the facility and by extension the euro zone as it seeks to get on top of its debt crisis.
"High demand is likely to be interpreted as showing there is confidence in this mechanism and, as a consequence, in the whole euro system," said Michael Leister, a debt strategist at WestLB in Dusseldorf.
Investors in Asia are expected to have bid strongly for the bonds, looking to add AAA-rated paper to their portfolios.
"It was always going to go well with the likes of the Japanese and Chinese reserve fund managers -- and probably a whole heap of others -- piling into it like there's no tomorrow," said Marc Ostwald, strategist at Monument Securities.
The bond was priced at mid-swaps +6 basis points, a source at one of the lead managers said.
The EFSF was set up in May 2010 after EU leaders agreed they needed a multi-billion-euro facility to handle future debt crises after Greece was forced into a bailout when it became impossible to finance itself on international markets.
Together with the 60-billion-euro European Financial Stability Mechanism and 250 billion euros from the International Monetary Fund, the EU has in theory a total of 750 billion euros available to tackle any future bailouts after Ireland.
However, because of cash buffers and other guarantees built into the EFSF to ensure that it retains a AAA rating, its effective lending capacity is estimated to be only 250 billion euros, which restricts how many bailouts it could handle.
Ireland received an 85 billion euro EU/IMF bailout in November, with around 18 billion euros of that due to come from the EFSF and 22.5 billion coming from the EFSM, a fund backed by European Union member states and also AAA rated.
Debt market analysts said the large order book for the EFSF bonds showed just how much appetite there was among investors for top-grade, AAA rated debt.
"Feedback we're getting from accounts is that they're welcoming this new asset class," said WestLB's Leister.
"They will be less liquidity than German Bunds or French paper but overall I expect them to have decent secondary market liquidity," he said, referring to how the bonds are traded after they are placed in the market.
"All the banks will want to rank highly in the dealer lists and turnover lists for these issues given that there are further transactions to come and they want to put themselves in a good position to be involved in the next deal." (Additional reporting by William James in London, editing by Mike Peacock)