LONDON: Spanish bond yields spiked on Tuesday on investor worries that a strong showing for secessionists in Scotland's independence vote could strengthen other separatist bids in Europe such as that in Spain's wealthy Catalonia region.
Pro-independence voters in Scotland are neck-and-neck with those who want the country to remain part of the United Kingdom ahead of a referendum on Sept. 18.
Investors see Spain as vulnerable, with Catalonia planning a referendum of its own in November - one which is not recognised by the Madrid government, however.
The pro-independence momentum in Scotland has gained significant ground in the past week and resonances in Spain may intensify over the next few days as Catalonia celebrates its national day on Sept. 11.
"It's pretty obvious now that ... investors are increasingly focusing on Catalan plans for ... independence, with the movement in Scotland having gained so much ground in the past few days," DZ Bank rate strategist Christian Lenk said.
Ten-year Spanish yields rose 10 basis points to 2.19 percent, while other euro zone yields rose 5-4 bps, underperforming for a second day.
"We're looking at Catalonia as something which may be a story for the rest of the year and we favour Italian bonds over Spanish bonds," one trader said.
However, Rabobank strategists said Spain's underperformance over UK gilts suggested much of the selling pressure reflected "a heavy dose of profit-taking" after a rally that pushed yields to record lows just above 2 percent.
As such, investors are in fact attaching a much smaller risk premium to Spanish bonds than the market moves suggest.
Rabobank said that the ECB's loose monetary policy meant that the Scotland-related selling pressure should be seen "as a pot hole rather than a road block" in the rally.
UK 10-year yields rose 4 bps to 2.52 percent.
Other analysts point to the fact that Madrid, unlike London, deems the referendum to be unconstitutional. Two polls showed on Sunday that a majority of Catalans believed the vote should not go ahead if it were illegal.
BUNDS
The rise in yields in the rest of the euro zone's markets came as the European Union delayed enforcing new sanctions on Russia and a study from the San Francisco Federal Reserve said the market may be underestimating the pace of U.S. rate hikes.
The sanctions, which target the ability of Russia's top oil producers to raise capital in Europe, were originally due to take effect on Tuesday. But the EU delayed implementing them to leave time to assess whether a ceasefire in Ukraine is holding.
The economic measures that Russia and the West have taken against each other have darkened the economic outlook in the euro zone and fuelled expectations the ECB may have to ease policy further.
The Ukraine ceasefire is prompting investors to pare back those expectations slightly, but the market remains cautious.
German 10-year Bund yields, the benchmark for euro zone borrowing costs, rose back above 1 percent to trade 6 bps higher on the day.
"Geopolitical events have diverted some cash flows. We're seeing ... some outflows from government bonds," ING rate strategist Alessandro Giansanti said.
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