Spanish bond yields recorded their biggest weekly rise in more than a year on Friday as expectations of a US interest rate hike exacerbated weakness triggered by concerns that Scotland's independence referendum was emboldening Catalan separatists. Spanish debt underperformed in a broad-sell off that also gripped US Treasury and German bond yields after solid US retail sales data was seen as increasing the potential for an earlier-than-expected rate hike from the Federal Reserve.
Interest rate rises in the world's largest economy will reverberate across the globe, despite many other central banks, including the ECB, maintaining ultra-loose monetary policy. "With no clear direction for euro zone bonds, the correlation with US Treasuries has become more important," said Alessandro Giansanti, senior rates strategist at ING. "Spain is a bit of a different story, because there is a lot of sensitivity to what is happening in Scotland around the referendum."
With more polls on Friday showing Scotland's vote next week is almost too close to call, many investors are nervous about the signals Scottish independence would send to Catalonia. Hundreds of thousands of people packed the streets of the region's capital Barcelona on Thursday to demand the right to vote on independence from Spain. The government in Madrid has not recognised a referendum planned in Catalonia - which accounts for 20 percent of Spain's national wealth - scheduled for November.
Spanish 10-year bond yields rose 11 basis points to a day's high of 2.42 percent, before reversing some of those losses. When European markets closed, yields were up 29 bps on the week - marking its worst run since June 2013. "There are plenty of conditional risks stemming from a 'Yes' vote including ... the potential for encouragement for separatist movements elsewhere, such as in Catalonia," said Chris Iggo, chief investment officer for fixed income at AXA Investment Managers.
A YouGov survey for the Times put Scottish unionists on 52 percent with separatists on 48 percent, while a Guardian/ICM poll put unionists on 51 percent and separatists on 49 percent, excluding those who said they did not know how they would vote. With many more polls scheduled before Thursday's vote, analysts expect trading in Spanish bonds to remain skittish. It could also prove to be a challenging backdrop for Spain to sell its new three-year bond next Thursday.
"By relatively weak ... but nonetheless quite real (association), the Scottish referendum process is giving rise to concerns about Catalonia," said Lars Peter Lilleore, chief income analyst at Nordea in Copenhagen. "That historical problem could flare up again and for investors especially in the northern part of Europe that adds a little bit of uncertainty that they don't think is compatible with the low yields in Spanish (government bonds)."
Elsewhere, German 10-year bond yields rose 5 bps to a one-month high of 1.097 percent, following a similar move in US Treasuries after August's US retail sales release. All other equivalent euro zone bond yields were also higher on the day. The solid data helped convince investors that the US Federal Reserve will rubber-stamp a shift towards higher interest rates at its meeting next Wednesday, as suggested by a study by researchers from the US central bank this week.
In other news, ratings agency Standard and Poor's upgraded Greece's credit rating to B from B-, citing substantial fiscal adjustment and predicting that the bailed-out country would emerge from a seven-year recession next year. In its latest bid to re-establish market access after a four-year exile, Greece also concluded debt exchange on Friday.