* Greece to sell 3-year bonds to take advantage of loose ECB policy
* Few euro zone bonds offer higher yields than Greece's 3-year
* Debt sale brings Greek debt refinancing risks forward
By Marius Zaharia
LONDON, July 10 Greek yields dipped on Thursday as the aid recipient readied an issue of three-year bonds in its second debt sale since its default, taking advantage of a European Central Bank promise to make long-term loans to banks.
The sale is expected to raise 3 billion euros and follows a five-year bond sale in April, which marked one of the fastest market comebacks by a sovereign following a debt restructuring.
It is also signalling Greece's gradual emergence from a debt crisis that started in 2010 and spread to other countries in the euro zone at its peak in 2011 and 2012, when Athens imposed heavy losses on private bondholders.
Although Greece is expected to come out of a six-year recession in 2014 and is running a budget surplus excluding interest rate payments, the renewed interest for its bonds has a more powerful force behind it.
The ECB's ultra-easy monetary policy has pinned yields on top-rated bonds at record lows and pushed investors towards riskier assets to maximise returns.
The central bank's latest plans to offer up to 1 trillion euros to banks in four-year loans at a rate of 0.25 percent from September makes high-yielding short-term debt particularly attractive. Banks can buy such debt with the ECB money and benefit from the rate differential.
"The new issue should see plenty of demand, and order books could easily rise to double digits," said Jan von Gerich, chief fixed income strategist at Nordea in Helsinki.
Greek 10-year yields fell 2 basis points to 6.09 percent, while five-year yields were flat at 4.25 percent. Both yields have risen in recent days as investors made room in their books for the new paper.
The initial guidance sees the bond yielding between 3.50 and 3.625 percent. Commerzbank strategists said the bond could eventually be sold for as little as 3.25 percent.
That was still higher than yields on all 10-year euro zone bonds apart from Portugal's and Slovenia's. Investors in Italian debt, for example, would have to buy a 15-year bond to get a higher yield than Greece's three-year paper. German 30-year paper offered 2.16 percent.
Greece sold its five-year bond at 4.95 percent and the strong performance in the market following its issuance was another incentive for investors to snap up the three-year paper.
"It looks like a free lunch," one trader said.
The new bond comes with a caveat. One of the most attractive features of Greek debt before this sale was that the country had no debt to pay back for the next five years, hence no near-term financing risk.
In the next three years, Greece would have to decide which path to take after the end of its second bailout deal with the International Monetary Fund and the European Union. It will also have to hold elections in 2016, or earlier if the fragile ruling coalition loses even more strength.
Anti-bailout leftist party Syriza did well in the May European Parliament elections and is expected to retain its support from a population deeply hurt by austerity. Bondholders prefer the predictability of a pro-bailout government.
"Of course the markets are looking at the redemption profile and at some point this could become an issue," said Rainer Guntermann, rate strategist at Commerzbank.
"But for now, yield levels in these smaller peripheral countries like Greece look attractive and you don't have many alternatives." (Reporting by Marius Zaharia, editing by John Stonestreet)