Tensions are rising in the market for Catalonian bonds, as the potential implications of an independence referendum later this year begin to seep into prices.
The Catalan regional government has voted to hold an independence referendum on October 1, though Madrid has said it will block the ballot.
Yields on regional Catalan debt, which move inversely to prices, have crept gradually higher over recent months. A bond maturing in 2018 is trading at a yield of 1.56 per cent, its highest level this year. At the start of July, the bond’s yield was below 0.9 per cent.
“As we get closer to the vote, we are likely to see a move wider in both Catalonian and Spanish spreads, and that will just be based on the tension that this could be a successful push [for secession],” said Matthew Cairns, a strategist at Rabobank.
Mr Cairns added that despite expectations of higher tensions over coming months, the impact has so far been “fairly muted”. He pointed to a general rise in European bond yields after a speech by European Central Bank president Mario Draghi in Portugal, in late June.
There are close to €6bn of Catalan bonds outstanding across 28 individual issues, according to Rabobank. The risk for investors as the referendum approaches is the prospect of redenomination following independence. The Catalan banking sector provides significant demand for the regional government’s debt.
The Catalan government’s hopes for a referendum follow on from a previous unofficial vote in late 2014, in which about 2.3m voters, or a third of the region’s population, took part, with more than 80 per cent backing an independent state.
In March last year, S&P, the rating agency, downgraded Catalan debt from double B minus to single B plus on “weakening financial management”. It also cited “political tensions” as contributing to its negative outlook on the region.
In a report published at the end of 2016, the rating agency said it considered the region’s financial management to be “very weak”, and pointed to a “weak budgetary performance and very high debt burden”, though it also factored in Catalonia’s strong economy and support from Madrid.
“Given Catalonia’s reliance on financial support from the central government, the region’s ongoing political conflict with the Spanish state remains a risk to the region’s creditworthiness,” analysts wrote.
Mr Cairns points to the “technical way in which this could play out”.
“There is an argument to say [that if] Catalonia were an independent state, given its revenues, that in time perhaps they could stand on their own two feet … but they are constitutionally part of Spain,” he said.
Spanish ten-year government bond yields are trading at 1.49 per cent, lower than their level at the start of July. Investors suggest that ECB policy changes could push yields much higher over the eurozone over the coming year.
“I see yields finishing the year higher than where they started,” said Alex Dryden, global market strategist at JPMorgan Asset Management. “I don’t think investors are positioned for this”.
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