* All eyes on Portugal
Greece on Tuesday sold six-month money at just under the rate of its bailout loans, clearing its first funding hurdle of 2011 as markets focused on a looming bond sale by the euro zone country viewed as next in line for a rescue.
Portugal, under increasing pressure to seek a bailout as yields on its debt trade at levels the market views as unsustainable, will offer five- and ten-year bonds on Wednesday.
Greece on Tuesday sold 1.95 bln euros of 26-week T-bills at 4.9%, more than the 4.82% it paid at the previous sale in November but slightly lower than expected, as bond dealers had expected a yield of 5.0-5.25%.
Traders said the country's more than one month absence from the market meant making accurate forecasts had been difficult.
"The auction was solid enough and the amount was indeed much larger than the previous auction, as expected," said Peter Chatwell, rate strategist at Credit Agricole. "But the market appears unable to be soothed by these results as the main event is tomorrow."
In what will be its first sortie onto bond markets this year, Lisbon hopes it can persuade investors to lend it funds at affordable rates.
Persistent investor concerns about debt servicing on the euro zone's periphery have driven the market rate on 10-year Portuguese bonds above 7%, a level seen as unsustainable, raising the chances it may follow Greece and Ireland down the road to a bailout.
Portugal's Finance Minister Fernando Teixeira dos Santos said on Tuesday there were no plans to seek aid and Prime Minister Jose Socrates said the country had beaten its 2010 budget deficit-reduction goal, though a central bank official earlier broke ranks to say it would be better to accept outside help.
Besides Portugal's debt offer, auctions by Italy and Spain on Thursday will be closely watched for signs of contagion on the euro zone periphery as calls for policymakers to pre-emptive action against the sovereign debt crisis grow more strident.
In a further sign of spreading tensions, the yield in Italy's short-term T-bill (BOTs) auction on Tuesday rose to its highest level since December 2008.
Market sources expect Portugal to draw sufficient demand on Wednesday to sell between 750 mln and 1.25 bln euros of October 2014 and June 2020 bonds combined, with yields seen rising to close to secondary market levels of around 6 percent for the shorter maturity and 7.1% for the longer one.
GREECE RELIEVED
The yield in Tuesday's Greek debt sale rose eight basis points from the previous sale in November but undershot market expectations of around 5.0-5.25%.
Foreign investors bought about 37% of the issue, a bit more than at the previous auction, the head of its debt agency (PDMA) told Reuters.
"We are satisfied that we continue to raise short-term funds unhindered," said PDMA's Petros Christodoulou.
Greek banks tend to buy most of the issues as they can earn an attractive carry on the T-bills, funding them cheaply at 1.0% through the European Central Bank.
Tuesday's bills were sold into a rollover, as 3.04 bln euros of one-year and six-month paper comes due on January 14. The agency is set for another auction, of three-month paper, next week as 1.44 bln of 13-week bills mature on January 21.
"The fact that the cost for six-month funds stayed below 5.0% was positive, showing Greece is borrowing at a lower rate than its bailout loans," said Costas Boukas, head of asset management at Beta Securities.
"There was an upbeat reaction in the stock market … It bodes well for the three-month T-bill auction next week."
Athens is eyeing a return to bond markets later this year, hoping that borrowing costs will by then have normalised thanks to economic reforms and progress on fixing its finances.
