LONDON: Spanish bond yields edged down on Wednesday after new opinion polls on Scotland's independence referendum, closely watched in Catalonia, showed a narrow lead for those supporting staying in the United Kingdom.
Bond yields fell across the euro zone as investors expected some of the long-term loans the European Central Bank offers this week to be invested in government debt, at least for a time.
But the fact that Spain kept up with its peers despite investors having to make room on their books for a debt auction on Thursday was a sign of strength, traders said.
Investors have dumped Spanish bonds in the past 10 days on concern that success for the "Yes" to independence camp in Scotland may embolden a similar secessionist move in Catalonia, which accounts for a fifth of Spain's economic output.
A Survation poll for the Scottish Daily Mail showed supporters of staying in the UK were in the majority one day before the vote, swaying some investors to buy Spanish bonds, traders said, although support for independence rose 1 percentage point to 48 percent.
Gambling company Betfair said on Tuesday it was already paying out winnings to customers who had staked money on a "No" vote.
"With polls overnight showing the "No" vote with a narrow majority, the hope is...the clamour for separation in Catalonia will ease," said Nick Stamenkovic, bond strategist at RIA Capital Markets in Edinburgh.
Spanish 10-year bond yields fell 3 basis points to 2.33 percent, having hit record lows of just above 2 percent at the start of the month. Spain sells up to 3.5 billion euros in bonds on Thursday.
Traders expected the market to be volatile as uncertainty about Scotland's future remained high, with the Survation poll showing about 8 percent of voters were still undecided. The overnight cost of hedging against sharp swings in the British pound doubled on Wednesday.
EASY MONEY
Portuguese two-year bonds, the highest-yielding in the euro zone, outperformed their peers in a sign that investors were positioning for Thursday's ECB offering of four-year loans to banks (TLTROs).
It will be the first in a series that could result in banks getting up to 1 trillion euros in cheap loans.
The aim is to encourage banks to lend to the real economy, but they can return the money to the ECB with no penalty if they fail to increase their lending books after two years. Meanwhile, they can invest in government bonds.
Portuguese two-year bonds were yielding 0.66 percent, down 6 bps.
"Investors are pre-empting the carry trade," said Marco Brancolini, a fixed income analyst at RBS.
At the other end of the credit risk scale, Germany sold 3.34 billion euros in two-year bonds at an average yield of minus 0.07 percent, with demand 2.3 times the amount sold.
Any excess cash kept in overnight deposits at the ECB incurs a 20 bps penalty so many investors prefer to lose 7 bps and keep the money in short-term, highly-liquid German debt.
Across the Atlantic, monetary policy outlook may be taking a different path. The Federal Reserve's pledge to keep rates near zero for "a considerable time" may be tweaked after a policy meeting ending on Thursday so that the wording brings forward expectations for interest rate hikes.
"Whilst a hint of an earlier-than-expected interest rate rise could well introduce some volatility into the market I find it difficult to believe that the Fed will do anything other than make haste slowly. There is no overwhelming need to come across all hawkish yet," said Gary Jenkins, chief credit strategist at LNG Capital.
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