LONDON: Spain's 10-year bond yield premium over Italy hit its highest in over two years on Friday on concerns about political instability if secessionists win an election in wealthy Catalonia later this month. Hundreds of thousands of independence supporters are expected to take to the streets to mark "Catalan Day" later on Friday to call for the northeastern region to break away from the rest of Spain.
Spanish bonds have underperformed Italian peers in the run-up to the Sept. 27 regional parliamentary election, which separatists want to use as a proxy vote on independence.
That is fiercely opposed by Spain's centre-right Prime Minister Mariano Rajoy, whose re-election bid in December could be complicated by events in Catalonia. Latest polls showed pro-independence parties could win a majority of seats but not enough to trigger an immediate "road map" to secession within 18 months.
The concerns over Spanish politics helped demand at neighbouring Italy's bond auction, where the Treasury raised its targeted 7.75 billion euros and paid lower yields on all three maturities sold.
Italian 10-year yields dipped 1 basis point to 1.84 percent while Spanish equivalents were 2 bps higher at 2.11 percent, widening their gap to 27 basis points, the most since mid-August 2013.
"The news flow is just keeping Spanish bonds under pressure here versus Italy. It seems like the path of least resistance now with Catalan national day and Italy now out of the supply arena," said Commerzbank strategist David Schnautz.
"Usually the Spanish and Italian investors have a tendency to buy whatever is offering yield pickup but this time around it seems like some of the investors are afraid of what's happening in Catalonia and are buying Italy versus Spain despite a yield give up."
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