Portuguese yields fall sharply after debt swap draws strong demand
* 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
LONDON, Dec 3 (Reuters) - Portuguese government bond yields fell sharply on Tuesday after a debt exchange met stronger demand than some in the market had expected, easing redemption payments next year when it hopes to exit its bailout programme.
Portugal swapped 6.6 billion euros in bonds expiring next year and in 2015 for longer maturities, in an exchange analysts said demonstrated the market's improved confidence in the country.
"The result they got this morning is quite positive," Luca Cazzulani, strategist at UniCredit said.
"Portuguese bonds are actually posting a rally, reflecting the fact that after this morning's exchange, next year's funding is going to be less challenging."
Five-year Portuguese yields fell 22 basis points to 4.89 percent and were poised for their biggest daily fall in nearly a month. Ten-year Portuguese yields were 11 bps lower at 5.89 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 exit 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.
Analysts said the bond swap would facilitate Portugal's bid to exit its programme but that it would still be prudent for the country to do so with the backing of 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.
Ireland said in November 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.
Investors were expected to be cautious before the European Central Bank meets on Thursday and the U.S. reports 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 withdraw monetary stimulus.