Portugal yields hit 3-year lows as Lisbon eyes bond auctions
* Lisbon plans to resume debt auctions in first half of 2014
* Spanish, Italian, other peripheral yields fall on ECB
* ECB stress tests: government debt will not be marked to market
LONDON, Jan 15 (Reuters) - Portuguese yields hit their lowest in more than three years on Wednesday after Lisbon said it expected to resume bond auctions in the first half of 2014 as it prepares to exit its international bailout programme.
Peripheral euro zone bonds were broadly firmer after the European Central Bank allayed investor concerns that local banks might be forced to sell large amounts of domestic government debt before upcoming stress tests.
The ECB said in a letter on Tuesday that European banks would not be required in the stress tests to adjust the sovereign debt portfolios they hold to maturity to reflect current market values.
The treatment of sovereign debt exposure in this year's balance sheet assessment is a key concern for banks, as they loaded up on local bonds during the crisis while foreign investors sold them.
Lisbon wants to take advantage of favourable market sentiment and plans to issue 11 billion to 13 billion euros ($15.1 billion to $17.8 billion) of bonds this year.
Portuguese 10-year bonds outperformed their peers, with yields falling 13 basis points to 5.198 percent, their lowest since August 2010.
"The Portugal developments are quite encouraging," said Riccardo Barbieri, a strategist at Mizuho. "There's a feeling that maybe things can turn around. Even the government sounds a bit more confident and the official lenders are quite positive on developments in Portugal."
"Whereas a few months ago the consensus was Portugal will need a second bailout, now the discussion is: 'They will exit the bailout. Do they need a precautionary loan or not?' My own view is they will probably apply for a precautionary line."
While Portugal is seen following euro zone peer Ireland and exiting its bailout programme in mid-2014, many analysts doubt it can manage without a back-up lending programme, unlike Dublin which made a "clean" break from its bailout.
STING OUT OF STRESS TESTS
Yields on other peripheral bonds fell, with those on 10-year Spanish debt heading back towards the five-year lows hit last week after the ECB statement that banks' holdings of sovereign debt would not be marked to market.
If bond holdings were marked to market, banks would be forced to buy and sell bonds more frequently, increasing market volatility. Reduced volatility will encourage long-term investment by banks and other investors.
Shares in euro zone banks jumped, and banks with the highest exposure to sovereign bonds were among the top performers.
"We would imagine that few market participants saw a serious risk the ECB will risk re-igniting crisis tensions by unduly penalising banks for holding government debt," said Rabobank senior rate strategist Richard McGuire.
"That said, this new detail ... will serve to mollify any lingering concern on this front."
Spanish 10-year bond yields fell 6 basis points to 3.77 percent, while equivalent Italian yields dropped 2 bps to 3.87 percent. Yields on Greek and Irish debt also fell.
Foreign investors held just over a third of tradeable Spanish debt in November, down from more than half before the crisis, according to the Spanish Treasury. The picture was similar in Italy, October data from the country's central bank showed on Tuesday.
Analysts say expectations of a pickup in global growth in 2014 are likely to increase the demand from overseas.
German 10-year Bund yields, the euro zone benchmark, edged up to 1.83 percent after higher U.S. producer price inflation and as Berlin kicked off its lightest conventional bond issuance programme since 2007.