Independence push in Catalonia dents appeal of Spanish bonds
Catalonia's parliament voted on Wednesday to hold an independence referendum on Oct. 1, setting up a clash with the Spanish government that has vowed to stop what it says would be an illegal vote.
Polls in the northeastern region show support for self-rule waning as Spain's economy improves. But the majority of Catalans want the opportunity to vote on whether to split from Spain.
The increased political noise has sparked an underperformance of Spanish bonds against their southern European peers in recent weeks.
On Thursday, the gap between 5-year bond yields in Italy and Spain <IT5YT=TWEB> <ES5YT=TWEB>, a gauge of how investors view relative risks, was around 47 basis points and its narrowest since early August.
The gap between 10-year bond yields in Italy and Spain <IT10YT=TWEB> <ES10YT=TWEB> has narrowed 10 bps in the past two weeks, also reflecting an underperformance of Spanish bonds against Italian debt.
"Italian political risks have moved into the background and while everyone assumes Catalonia won't become independent, the game of chicken continues," said ING senior rates strategist Martin van Vliet. "That's why we see a modest underperformance of Spanish bonds."
Spain's government bond market has also underperformed the euro zone's benchmark issuer, top-rated Germany.
The Spanish/German 10-year yield spread was at around 110 bps on Thursday, having hit 111 bps on Wednesday -- its widest since mid-July.
(Reporting and graphic by Dhara Ranasinghe; Editing by Toby Chopra)