Spanish bonds underperform as traders eye Scottish vote

Spanish bonds underperformed euro zone peers for most of the day on Monday, with some traders and analysts saying Scotland's looming independence vote could reignite a similar separatist bid in Spain's Catalonia region. A weekend poll showing the pro-Scottish independence camp in the lead only 10 days before the September 18 referendum served to rattle sterling currency and money markets.
Many in the market said there was no close relationship between what happens in Scotland and what could happen in other European regions, and the limited price action seemed to suggest that was a widespread view. But some pointed to potential consequences outside Britain. Traders said the uncertainty prompted a small part of the market to book profits on Spanish bonds after a sharp rally last week in the wake of European Central Bank rate cuts.
Spanish 10-year yields were 3 basis points higher at 2.09 percent, off the record low of 2.05 percent hit last week. The bonds underperformed other euro zone debt for most of the day, but by the time the market closed in Europe other yields had caught up with the Spanish ones. Italian yields were also 3 bps up at 2.30 percent, within sight of a record low of 2.255 percent. Michel Juvet, chief investment officer at Swiss bank Bordier, said a Catalan movement to break away from Spain could gain encouragement from a victory for Scotland's "Yes" campaign.
"The consequences in Europe could be bad," he said. Many expect any profit-taking in peripheral euro zone bonds to be modest, with yields expected to resume their downward trend as the ECB's openness to large-scale bond purchases spurs investors into riskier assets to maximise returns. "We're seeing a bit of a setback (in Spain and Italy) coming on the back of the very strong rally that we've seen towards the end of last week, but I think the setback will be short-lived and will be seen as a buying opportunity," Commerzbank strategist Rainer Guntermann said. The ECB cut its main refinancing rate to 0.05 percent, raised the penalty for banks keeping money overnight in central bank deposits to 0.2 percent and unveiled plans for an asset-backed securities and covered bond purchase scheme.