* Portugal's last sale of the year could be expensive
* Greek T-Bill set to yield above 7 percent
* German new Schatz coupon could be set at 1.0 percent
By George Matlock
LONDON, Nov 5 (Reuters) - Bond sales by stressed euro zone sovereigns Portugal and Greece are set to be the highlight of next week's bond market calendar, with the former expected to pay a hefty premium as it completes its issuance for the year.
Grey market readings also suggest that Greek short-dated paper could yield over 7 percent at its auction next week, well above the rate at which it is being lent funds by the European Union and the International Monetary Fund.
A total of 20.5 billion euros of bonds is expected to be sold next week week, including a new two-year German Schatz and possibly an ultra-long issue from Italy.
However there will be no cash in the market from redemptions to help the paper find a home, a situation that will continue in the euro bloc until December.
Market players expect Portugal, which is facing pressure to approve its austerity budget in parliament, to issue up to 1.25 billion euros of five- and 10-year bonds. Analysts said the government would have to pay up if it wanted to lure buyers.
"The yield of the 4.8 percent June 2020 Portuguese OT issue should be far above the level where Ireland concluded its bond issuance for the year in late September which was 6.02 percent for the Irish eight-year maturity bond," said Commerzbank bonds analyst David Schnautz.
On Friday, the Portuguese 10-year bond yielded 6.64 percent.
The 10-year Portuguese/German yield spread was at 425 bps, close to a euro zone lifetime high of 440 bps, while the Irish/German yield spread hit a euro lifetime peak at 553 bps PT10YT=TWEBIE10YT=TWEBDE10YT=TWEB.
"Such high levels in absolute yields in the primary market fuel the discussion about Portugal and Ireland getting closer to call for external help," Schnautz said, adding this would add to the debate about finding a permanent solution to future crises.
Schnautz predicted Portugal might need to return to the market one more time this year after next week, but others said the sovereign would likely be able to raise the funds it needs.
"It's not the best timing (for Portugal) but they've tended to find domestic demand and get auctions done," said Orlando Green, a rate strategist at Credit Agricole.
Nov 05, 2010�1:56pm EDT
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This article makes a false statement. Portugal approved the austerity budget on wednesday. This article should be corrected.