UPDATE 1-Spain easily sells debt despite Portugal, yields up
MADRID, July 4 (Reuters) - Spain's medium-term bond yields inched up at auction on Thursday as neighbouring Portugal's government sought to heal a rift that threatens its survival, although strong demand helped Madrid easily meet its target amount.
The Treasury raised 4 billion euros ($5.2 billion) by selling a new five-year bond and reopening a three-year bond.
The yield on the three-year paper rose to 2.875 percent from 2.706 percent when it was last sold a month ago, while the new five-year was priced to yield 3.792 percent, about 20 basis points more than at Spain's last sale of five-year debt in June.
"The recent Portuguese-driven correction has enhanced the attractiveness of Spanish bonds and the auction was taken down very well," said Nick Stamenkovic, bond strategist at RIA Capital Markets in Edinburgh.
"The outlook in Portugal is very clouded. What's interesting is that Italy and Spain have been relatively resilient. The contagion is very limited and a sign that investors see those problems as very localised and don't see them being a threat to the euro zone."
France also raised nearly 8 billion euros on Thursday at an auction of two bonds that drew ample demand from investors but saw yields rise.
Spain has now raised more than 66 percent of its 2013 bond issuance target, having taken advantage of demand for higher-yielding debt from investors flush with central banks' cash.
The auction on Thursday was likely to have drawn support mainly from domestic buyers, with Bank of Spain figures showing non-resident investors reduced their exposure to Spanish paper in each of the four months to April.
After a buoyant start to the year, caution has crept back into markets since the U.S. Federal Reserve said last month it would begin scaling back its money-printing, and amid renewed political tensions in Portugal and Greece. The tone was also cautious on Thursday ahead of the European Central Bank's monthly meeting.
Spain's benchmark 10-year bond yield has risen to around 4.8 percent from a May low of 4 percent but is still a long way from its peak of over 7.6 percent, hit last July before the ECB pledged to do whatever was needed to defend the single currency.
Demand at Thursday's sale for 3 billion euros of five-year bond outstripped supply by 1.7 times, while bids for 1 billion euros of three-year paper were 3.5 times the offer amount. ($1 = 0.7709 euros)
(Additional reporting by Clare Kane and London Debt desk; Editing by Catherine Evans)