LONDON: Spanish government bond yields rose sharply on Wednesday, edging back above 1 percent ahead of a key vote in parliament that could either end an eight-month political deadlock of lead to another election.
Spain's Socialists are expected to vote against the government of acting Prime Minister Mariano Rajoy in a confidence vote.
Spain's 10-year bond yield rose 6 basis points to 1.01 percent, underperforming its euro zone peers which were 2-3 bps higher on the day.
"The political risk premium in Spain is on the rise," said Nick Stamenkovic, a bond strategist at RIA Capital Markets. "A month ago the market was confident about an agreement being reached but the Socialists are not playing ball, so the risk is that Rajoy doesn't win the confidence vote today and the chance of another election rises."
If Rajoy loses Wednesday's vote, a second vote will take place on Friday in which delegates can abstain.
He needs a simple majority only in that vote to allow him to form a government.
Commenting on Spain, ING senior rate strategist, Benjamin Schroeder, said: "Today will be a first test, though expectations are that it just kicks off proceedings. The focus is more on the vote on Friday."
Elsewhere, Germany sold 4 billion euros of two-year Schatz, or government bonds, via auctions and Portugal raised 1 billion euros from the sale of five and 10-year bonds.
Finland was in the market for a seven-year bond in what is set to be the first syndication from a euro zone state that produces a negative yield.
Data on Wednesday meanwhile showed eurozone inflation was stable in August, against expectations of a slight rise, putting more pressure on the European Central Bank to act again.
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