Spanish bond yields rise as Catalan independence drive back on track

Spanish bond yields rose on Monday after Catalonia's parliament swore in a new separatist leader, putting back on track the region's pro-independence movement's bid to break with Spain. After months of negotiations, Catalan parties agreed at the weekend to make Carles Puigdemont, the mayor of Girona, the head of a majority separatist Catalan parliament. The new government is expected to resume the push for secession.
An announcement for an upcoming debt sale from the Spanish government also pushed yields higher as investors made room in their portfolios for the new bonds. "The separatists are once again unified and no longer in a situation where they face a new election, so they can push forward with the idea of independence in 18 months' time," said Daniel Lenz, a strategist at DZ Bank.
Spanish government bonds were the worst hit in a broad sell-off, with yields on its 10-year bonds up 9 basis points at 1.81 percent. Italian equivalents rose 6 bps to 1.59 percent and Germany's were up 3 bps at 0.54 percent. The gap between Spanish and German 10-year yields hit its widest level in two months at 127 bps. The yield on five-year Catalan bonds, the most liquid segment of the Catalan curve, traded at about 2.92 percent - up from last week's one-month low of about 2.88 percent. The 11th hour decision in Catalonia echoed a fraught national political scene. In an inconclusive general election last month, Spain's ruling People's Party (PP) won the most seats but lost its parliamentary majority.
The resurgence of a unified independence movement increases pressure on PP leader and acting Prime Minister Mariano Rajoy and his Socialist rivals to bury their differences and form a German-style "grand coalition" in Madrid to thwart the Catalan parties. That prospect that was seen by analysts as a positive for Spain's bond market, potentially limiting any further rise in Spanish yields,
On the negative side, Rabobank said Spanish bonds were likely to be at risk should the prospect of a Catalan secession raise concerns about Spain's ability to service its debt, given the region is one of the country's wealthiest. Spain's debt as a percentage of its economic output stood at 99.3 percent in the third quarter of last year, above the government's forecast of 98.7 percent by the end of the year.