Spanish bonds brush off election threat as Italian prospects seen worse

LONDON: Spanish bond yields inched higher on Wednesday ahead of a possible snap election call, though the sell-off was limited as Italy's economic and political prospects look worse, said analysts.

Spanish Prime Minister Pedro Sanchez is expected to announce early elections if his government, as forecast, loses a budget vote following its refusal to negotiate with Catalan leaders over their ambitions to call a referendum on independence, political sources said on Tuesday.

Spanish 10-year government bond yields were around one basis point higher at 1.263 percent, off lows of 1.187 percent hit on Feb. 1. Five-year bond yields rose 1.8 basis points to 0.24 percent.,.

The limited price moves suggest investors are more concerned with Brexit developments and newsflow out of Italy, according to Jean-Christophe Machado, rates strategist at Natixis.

"The fact that Italy is in a bad position has given Spain a boost," he said. "If you want to be diversified, you go for Spain. The Spanish bond didn't blink with the BTP (Italian yield) widening."

However, Machado said that Spanish bonds were in the longer term vulnerable in the face of further negative developments in both BTPs and Brexit.

"If we had a huge sell-off in Italy and Brexit went badly, Spanish bonds would suffer," he said.

Italian government bond yields have blown out since the end of January on growth concerns, as well as the possibility of early national elections there.

Italy's 10-year government bond yield was last at 2.866 percent, off the lows of 2.57 percent hit at the end of January .

The spread of 10-year Italian debt over Spain tightened to 160 basis points on Wednesday, having widened to as much as 178 basis points on Friday.

Spain's budget proposes to slash the deficit but boost special spending.

Two small Catalan pro-independence parties, on whose votes the government has been relying to pass legislation, have so far maintained their blanket rejection of the budget.

Sources in the government and Sanchez's Socialist party said no date had been set for a snap election, though April 14 was most likely, followed by April 28, because the prime minister wanted a ballot as soon as possible to mobilise left-leaning voters against the threat of the right coming to power.

Elsewhere in the bloc, German government bond yields held flat to Tuesday's close and were at 0.13 percent.