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imageLONDON: Spanish bond yields fell on Wednesday after new opinion polls on Scotland's independence referendum, closely watched in Catalonia, showed a narrow lead for those who wanted to remain in the United Kingdom.

Elsewhere in the euro zone, yields fell on expectations some of the long-term loans the European Central Bank is offering this week will be re-invested in government debt.

Spanish bonds were the stand-out performers, though. They reversed losses that piled up over the past 10 days, amid concern a victory for Scottish separatists would encourage Spain's own separatists in Catalonia, which accounts for a fifth of Spanish economic output.

Those fears were eased by two polls overnight that put support for the union at 52 percent. Ten-year yields hit a day's low of 2.25 percent, some 11 basis points down on the day, after a third poll was released showing the same trend.

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. Traders said the move bode well for Spain's auction of up to 3.5 billion euros in bonds on Thursday.

EASY MONEY:

Portuguese two-year bonds, the highest-yielding in the euro zone, outperformed their peers in a sign that investors were positioning for the ECB's offering on Thursday of four-year loans to banks.

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 0.65 percent, down 7 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.

In the United States, the outlook for monetary policy may change. The Federal Reserve's pledge to keep rates near zero for "a considerable time" may be tweaked at a policy meeting that ends on Thursday, bringing 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.

INFLATION SLUMP:

Tame U.S consumer price growth soothed worries of an imminent tilt towards tighter monetary policy from the Fed. But it also pushed down market expectations of euro zone inflation.

The five-year, five-year forward breakeven rate the European Central Bank's preferred measure of what the market thinks the inflation outlook is fell to 1.9341 percent from around 1.96 percent before the US CPI report.

Traders said that was the lowest since August. "The big impact today was that the US inflation print was very low, and that has a bearing on other markets to some extent," a trader said.

"It looks very similar to levels hit in August, which were also similar to lows hit in the euro zone crisis period of 2010 and 2011."

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