Stocks and Bonds Rattled as Spain Moves to Suspend Catalan Power

(Bloomberg) -- Spanish bonds were shaken and the country’s stocks erased two days of gains as Prime Minister Mariano Rajoy’s government deployed its ultimate constitutional weapon in a bid to bring Catalonia’s bid for independence to an end.

Spain’s 10-year bond yield climbed from a one-month low after the country said it will move forward with the process of suspending the powers of the Catalan government following Regional President Carles Puigdemont’s refusal to drop his claim to independence. The IBEX 35 Index slid as much as 1 percent, while the nation’s credit default swaps jumped.

Tensions between Catalan secessionists and the central government in Madrid have remained high since an illegal referendum on Oct. 1 that buffeted Spanish bonds. Investors will be following the next moves by Madrid closely, as well as those of the regional government in Barcelona.

“There has been some nervousness around the deadline this morning,” said Antoine Bouvet, a London-based rates strategist at Mizuho International Plc. The situation is “serious but not unexpected. The next step is likely to be lingering political uncertainty with the organization of regional elections. In this context, volatility should remain elevated for a period of time even if over the medium term, economic fundamentals of Spain are strong.”

Contagion was broadly contained, however. The euro initially fell as much as 0.2 percent on the news in a knee-jerk reaction, before recovering to climb 0.3 percent to $1.1823 at 12:22 p.m. Madrid time.

Auction Success

Spanish 10-year bond yields rose one basis point to 1.62 percent, having touched 1.54 percent on Wednesday, the lowest level since Sept. 20. The bonds pared their decline after the Treasury in Madrid sold 4.5 billion euros ($5.3 billion) of debt maturing between 2021 and 2046, compared with a target of 4 billion to 5 billion euros, just after the Catalan announcement.

Still, the country’s CDS spreads rose a second day and were quoted at 73.45 basis points, according to CMA data. That’s wider than the likes of India and South Korea. The equity benchmark’s 0.8 percent retreat erased almost all of the past two-days of gains. Spain’s gauge has been underperforming major western-European peers since the referendum.

--With assistance from Simon Ballard

To contact the reporters on this story: John Ainger in London at jainger@bloomberg.net, Anooja Debnath in London at adebnath@bloomberg.net, Namitha Jagadeesh in London at njagadeesh@bloomberg.net.

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Robert Brand