* Spain to sell up to 3 billion euros of bonds
* Waning contagion fears from Portugal to help demand
* France also sells up to 10 billion euros of bonds
By Emelia Sithole-Matarise
LONDON, July 17 Spanish bond yields held steady
on Thursday before a debt sale seen drawing strong demand as
fears recede of contagion from the financial troubles faced by
the founding family of Portugal's biggest listed bank.
The euro zone bond market has stabilised this week with
investors more optimistic that Lisbon-listed Banco Espirito
Santo will be able to deal with any exposure to
problems facing companies of its founding family.
Spanish and Italian bonds have traded independently of
junk-rated Portuguese and Greek debt, with market participants
saying the concerns around BES pose no systemic risk for the
This made for a favourable backdrop for the Spanish debt
sale of up to 3 billion euros of 2017, 2022 and 2032 bonds.
The small size of the auction and the fact that the bonds on
offer cheapened last week favoured a strong sale, traders said.
"It should be well supported. There's good reason to believe
that the nature of the BES issue ... should be contained and not
something that should become a systemic issue," said Anton
Heese, a strategist at Morgan Stanley.
"Net supply over the next quarter is negative so it's not as
if the market is being called up to absorb large amount of
supply over the next few months. That's also a supportive
Spanish 10-year yields were flat on the day at
2.66 percent while Italian equivalents were a touch lower at
GETTING IN CHEAPER
Thursday's bond sale will see Spain complete around 70
percent of its 2014 funding programme. Both Madrid and Rome have
ramped up their debt sales, taking advantage of an investor hunt
for yield that has driven their borrowing costs to record lows.
The prospect of a fresh round of European Central Bank
long-term loans to banks later this year is fuelling demand for
peripheral euro zone bonds, which still offer relatively higher
yields than those on better-rated euro zone bonds.
Additionally, some investors see last week's sell-off in the
periphery as an opportunity to buy at cheaper levels.
"We expect a successful auction, with investors who have
missed the huge rally this year possibly taking advantage of the
recent setback to accumulate exposure," Unicredit strategists
said in a note.
France will also sell up to 8.5 billion euros of two-, four-
and five-year bonds as well as up to 1.5 billion euros of 2018
and 2024 debt linked to euro zone inflation and 2021 paper
linked to French inflation. Bond redemptions from core euro zone
countries this week and the ECB's ultra-easy monetary policy are
seen supporting demand there too.
Portuguese 10-year yields were steady at 3.74
percent after falling more than 10 bps on Wednesday on
reassurances from BES and Lisbon that the bank was well
capitalised and able to deal with any exposure to the troubled
companies of the Espirito Santo family.
(Editing by Catherine Evans)