* Portugal's BES says not at risk of running short of
* Greek, other peripheral euro zone bond yields fall
* Italy tests demand with up to 7.5 bln euro bond sale
By Emelia Sithole-Matarise
LONDON, July 11 Portuguese bond yields fell on
Friday as the country's biggest bank sought to reassure
investors about its financial stability after concerns over the
health of its parent company rattled financial markets this
Investor worries about losses on loans to the parent company
of Banco Espirito Santo accelerated a sell-off in
Portuguese assets this week that triggered the first significant
episode of contagion this year in peripheral euro zone bonds.
Euro zone bonds recovered some poise after Banco Espirito
Santo said on Thursday night that losses on loans to the
troubled business empire of its founding family will not put BES
at risk of running short of capital.
Yields on Portuguese 10-year bonds were down 10 basis points
at 3.92 percent. They had risen about 40 bps this
week, their biggest weekly increase this year.
"It (the sell-off) was a bit overblown. After the huge rally
behind us in non-core bonds as well as equities, we've had a
multitude of bad news ... and so the market clearly needed a
trigger for profit-taking and that's what happened," said Jan
von Gerich, chief fixed income analyst at Nordea.
"For now at least, the sentiment will remain nervous but I
don't think its something that will reverse the general downward
trend in peripheral bond yields."
Yields on bonds issued by bailed-out Greece, whose
three-year debt sale on Thursday was undermined by the fallout
from Portugal, were 4 bps lower at 6.28 percent.
Italy will provide a further test of investor appetite for
peripheral bonds later in the day, when it auctions up to 7.5
billion euros of short- and long-term bonds later in the day.
Many in the market expect Rome to sell the maximum amount it is
targeting, noting that this week's rise in yields might attract
buyers to the larger, more liquid peripheral bond markets.
Italian 10-year yields were 3 bps down at 2.91
percent. Spanish equivalents were 2 bps lower at
"The sell-off may provide some attractive entry levels into
the periphery, which still offers some yield pickup in an
environment of even lower core rates," one trader said.
(Editing by Larry King)