Spanish Bonds Advance Amid Political Game of `Ping Pong'

Updated on
  • Bond yields decline as Catalan leader delays independence call
  • Prime Minister Rajoy starts move to suspend Catalan government

Barclays' Fernandez Says Catalan Question Not Over

Spanish bonds rose after Catalan separatists rowed back from an immediate declaration of independence, making an economic crisis less likely.

Yields on the nation’s securities fell across the board after Catalan President Carles Puigdemont said that while he had a mandate for separation, he would seek talks with the government in Madrid in coming weeks. However, the hiatus in the tensions could be threatened by Spanish Prime Minister Mariano Rajoy’s move to initiate the process that could lead to the suspension of the rebellious regional government.

“The market has removed some of the risk premium,” Marc Ostwald, a strategist at ADM Investor Services International Ltd. in London, said in emailed comments. But, “this is a game of ping pong -- Rajoy is playing Puidgemont at his own tactics of deliberate provocation.”

The yield on the nation’s 10-year debt was down two basis points at 1.67 percent as of 12:13 p.m. in London, off an earlier low of 1.65 percent. The extra premium that investors demand to hold the nation’s debt over comparable bunds shrank four basis points to 121 basis points.

Simmering Tensions

Heightened rhetoric following the region’s illegal referendum on Oct. 1 have roiled Spain’s notes as separatists sought to clear a path for secession and the central government in Madrid refused to grant any leeway. Mass protests at the weekend and a spate of companies making moves to leave Catalonia in recent days have applied further pressure, boosting bonds.

Rajoy took the first necessary step toward possibly suspending the Catalan government under Article 155 of the Spanish Constitution Wednesday morning, by making a formal demand on Puigdemont’s government to explain whether it actually declared independence. Spain’s 10-year bonds pared some of their earlier gains but stayed higher.

“The Spanish market has rightly opened stronger in response to the climb-down from the Catalonia president which allows the market to price out some tail risk,” Peter Chatwell, head of European rates strategy at Mizuho International Plc, said in emailed comments. However, “this will probably not be a complete normalization as the political uncertainty is still elevated.”

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