January 11, 2017 / 1:09 PM / 7 months ago

UPDATE 2-Portugal yields fall after bond sale test; Trump in focus

* Lisbon to sell 3 bln euros of 10-year bonds

* US President-elect Trump news conference under way

* Italy court blocks referendum to scrap Renzi's labour reform (Adds move in Italian bonds, Trump news conference)

By John Geddie and Dhara Ranasinghe

LONDON, Jan 11 (Reuters) - Portuguese bond yields pulled back from 11-month highs on Wednesday as the country got through one of its toughest bond sales in years, while safe-haven bond yields fell as Donald Trump held his first news conference since November's election.

Peripheral bonds received an additional boost after a key court rejected a bid by Italy's biggest labour union to hold a referendum on recent rule changes that made it easier to fire workers. Italian yields fell to a one-week low after the ruling.

Wrestling a bank crisis, a sluggish economy and reduced support from the European Central Bank, Lisbon is poised to sell three billion euros of a new 10-year bond on Wednesday after attracting demand of more than 8.5 billion euros.

"If you look at how much issuance Portugal needs to do this year, and we're looking at around 16 billion euros, that's already around 15-20 percent of their issuance in one go in this auction," said Orlando Green, European fixed income strategist at Credit Agricole.

"That might be what the market is looking at and that may have given Portugal a small bid today."

Germany sold 4 billion euros of 10-year debt on Wednesday at its regular auction, with strategists saying demand was supported by concern about Donald Trump's first press conference since he won November's U.S. presidential election.

Trump's calls for fiscal stimulus have pushed up inflation expectations, and with it stocks and bond yields. But his protectionist statements and jibes at China are considered potential sources of diplomatic tension that could roil markets.

As the news conference got underway in later European trade, U.S. Treasury yields fell - pushing safe-haven German bond yields lower still.

German 10-year yields -- the bloc's benchmark -- fell 4.4 basis points to 0.24 percent, keeping clear of Monday's 0.325 percent three-week high.

NORMALISE

Portuguese 10-year yields fell 7 bps to 3.98 percent , while Spanish yield were down 6 bps at 1.42 percent.

Portugal has been benefiting less than others from the trillions of euros the European Central Bank has spent buying bonds, and it is just one ratings downgrade away from being excluded from the ECB's bond purchases altogether.

Strategists said Portugal's bond sale could ease concern about a lack of its debt available for the ECB bond-buying programme.

"The new benchmark and the resulting injection of liquidity, PSPP-related purchases of Portuguese government bonds could well normalise to some extent, at least in the short term, and unfold their positive yield-compressing effect," DZ Bank strategist Sebastian Fellechner said.

Italian yields extended their falls to a one-week low of 1.85 percent after Italy's Constitutional Court backed the 2015 "Jobs Act" - a flagship project in former premier Matteo Renzi's bid to breath life into the economy.

The court accepted the CGIL union's proposals for two other referendums, however - on the use of vouchers to pay workers who have no contract, and on contracting companies' obligations to workers.

For Reuters new Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets (Editing by Larry King)

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