* Portugal swaps 6.6 bln euros of 2014/2015 bonds
* Portuguese yields fall sharply after swap
* Other euro zone yields dip before ECB, U.S. jobs data
By Ana Nicolaci da Costa and Emelia Sithole-Matarise
LONDON, Dec 3 (Reuters) - Portuguese government bond yields fell sharply on Tuesday after a debt exchange drew stronger demand than some in the market had expected, reducing redemption payments next year when Lisbon hopes to emerge from its bailout.
Portugal swapped 6.6 billion euros in bonds expiring next year and in 2015 for longer maturities, in an exchange analysts said demonstrated improved market confidence.
“It was a big success as it really helps lower the refinancing needs over the next two years ... which is also very good for Portugal when it’s about to bargain with the troika (of official lenders) about the (new aid) framework it will need,” said Commerzbank strategist David Schnautz.
“It’s also a show of market confidence that they are OK with medium-term exposure rather than only short end.”
Portuguese 5-year yields fell 19 basis points to 4.92 percent and were poised for their biggest daily fall in nearly a month. Ten-year yields were 10 bps lower at 5.9 percent.
Equivalent Spanish yields fell 4.2 bps to 4.12 percent, falling in line with most other euro zone debt.
Analysts had expected the swap to go smoothly after markets made room for the exchange by selling Portuguese debt on Monday and as easy monetary policy and ample liquidity continue to support lower-rated bonds.
Portugal’s treasury secretary told Reuters on Monday Lisbon intends to issue new bonds early in 2014 and a debt exchange would be a logical first step in that direction. She said investors were increasingly interested in Portuguese debt.
“The market thought that if they did 3 (billion euros) that would have been a good result, so 6.6 is good for Portugal in terms of their attempt to exit the bailout,” one trader said.
Lisbon hopes to complete its 78 billion euro European Union/International Monetary Fund bailout by mid-2014 - possibly with a back-up line of credit - although a number of budgetary hurdles remain.
It aims to emulate Ireland which is on track to end its rescue programme later this year, though Dublin has said it would make a clean break from its EU/IMF bailout, forgoing a precautionary credit line that some of its European partners had wanted it to take.
Analysts said the bond swap would help Portugal to move on but it would still be prudent for the government to negotiate a credit line.
“Given the level of yields where we are now, a backstop for Portugal makes much more sense than (it did) for Ireland,” Sunrise Brokers’ head of fixed income research Gianluca Ziglio said.
Investors were expected to be cautious before the European Central Bank meets on Thursday and the U.S. report on non-farm payrolls on Friday.
While the ECB is expected to remain on hold after a surprise rate cut in November, the jobs number will help determine investor expectations about when the Federal Reserve will start to reduce its monthly monetary stimulus.