* Portugal expected to sell 5-yr bond on Wednesday * Sale will be first since Portugal's 2011 bailout * Spanish yields lower after successful new 10-yr bond sale * Sale is Spain's first new 10-yr bond since November 2011 By Emelia Sithole-Matarise and Ana Nicolaci da Costa LONDON, Jan 22 (Reuters) - Portuguese 10-year yields fell to their lowest in over two years on Tuesday with investors buoyed by news the country was set to tap the bond market this week for the first time since it was bailed out in 2011. This followed robust demand earlier at Spain's first sale of new 10-year bonds in over a year as Madrid made the most of renewed appetite for debt from the euro zone's weaker economies. Portugal was expected to keep up the successful run of peripheral bond sales on Wednesday. Thomson Reuters service IFR said Lisbon planned to reopen its benchmark October 2017 bond, according to a bank managing the deal, and has mandated Barclays, Banco Espirito Santo, Deutsche Bank and Morgan Stanley to manage the sale. Portuguese 10-year yields fell as much as 25 basis points on the day to 5.85 percent - the first time they have traded below 6 percent since October 2010. The bonds outperformed peripheral euro zone peers and German benchmarks and took some of the shine off Spanish debt, cutting their yield premium to its lowest since July 2010 around 70 basis points. Traders and strategists expected further falls in Portuguese yields in coming sessions with the sale, via syndication, was seen meeting solid demand due to the scarce bond issuance from Portugal. Investors were also emboldened to buy Portuguese debt after a top European Union official said the bloc were examining ways to lower the financial burden on Lisbon and fellow bailed out Ireland to help them return to international bond markets later this year. "People are looking at Portugal exiting its bailout programme and we had confirmation of this syndicated issue from Portugal, the first time in two years since we've seen them issue a bond. This is good news," said David Keeble, global head of fixed income strategist at Credit Agricole. "It (the Portuguese sale) will go like Spain's. There's incredible appetite. It's a rarer issuer so I don't think there will be a problem...That's a market that has further to run. We're on the exit path now so it's difficult to stand in the way of the rally," he added. The Portuguese government and the debt agency IGCP declined to comment on the planned sale. But Finance Minister Vitor Gaspar said in Brussels on Monday Lisbon was "ready to take advantage of any opportunity that arises on the bond market to carry out a primary issue and take a step towards regaining full market access". SECURE DEMAND The spotlight on Portugal prompted some investors to book profits in Spanish bonds after their sharp rally earlier following Madrid's 10-year bond sale which raised 7 billion euros, way above an initial target of 4 billion. A sale of treasury bills was also above target and met strong demand. Spanish 10-year yields ended 4 bps lower on the day at 5.12 percent. Yields on Spanish debt have fallen sharply since the European Central Bank pledged in September to buy the bonds of struggling euro zone states that apply for aid. Ten-year Italian yields were also 3.7 bps lower at 4.19 percent. Madrid's sale follows Rome's successful 6 billion euro sale last week of its first 15-year bond in more than two years. The decision to sell the Spanish bond via a syndicate of banks was seen securing demand, while Spain is also expected to continue benefiting from an environment in which the promise of central bank support has given investors space to seek returns. "I think people will look at the carry that's there ... and in the current mood there will be more than enough people out there who will be willing to chase (yields), plus the domestics," said Monument Securities strategist Marc Ostwald. At the euro zone's core, German Bund futures rose 22 ticks on the day to settle at 143.12, reversing earlier losses with traders citing renewed buying interest at levels close to last week's lows of 142.54 - seen as near-term technical support. Data showing an unexpected fall in U.S. existing home sales in December, sparked by some worries over the pace of recovery in the housing market, kept low-risk debt propped up.