Catalan bonds recover as Spain break-up fears ease

The premium that investors demand to lend to the Spanish region of Catalonia is shrinking because they believe that efforts to break away and form an independent state are losing momentum.
Reduced investor concern over a possible breakup of the euro zone's fourth largest economy coincides with broader political uncertainty in Spain where a caretaker government has been in charge after two inconclusive elections since December.
Catalonia's debt gained ground on Spanish government bonds this week after investors interpreted reduced turnout at rallies on Sunday — Catalonia's national day — as an indication that the independence drive was weakening.
Pressure from separatists in Spain's richest region, home to the city of Barcelona and producing about a fifth of the nation's economic output, is viewed negatively in financial markets.
Ratings agency Standard & Poor's, for example, has said it could reduce Catalonia's B+ credit rating — already well short of the highest and safest investment grade — by one or two notches if tensions escalate between the region and Madrid.
"Catalonian bonds have been recovering from the losses suffered earlier this year, given that the independence movement doesn't seem to be going anywhere for the moment," said Mark Dowding, partner and co-head of investment-grade debt at BlueBay Asset Management.
BlueBay AM owns Catalan bonds and has been adding to positions this year, Dowding said. "At the independence rally this week, a lot less people turned up compared to last time, and that sort of confirms the suspicion that support for independence is decreasing," he said.
Catalonia's "La Diada" national day is an annual rallying point for the independence movement. Police estimate just over 800,000 people took to the streets across the region last Sunday, compared with closer to 1.4 million last year when Barcelona was the focal point.
The yield on Catalan bonds maturing in February 2020 has since fallen as much as 31 basis points to 3.28 percent, and the premium over the Spanish equivalent has shrunk 25 bps to 328 bps, according to Tradeweb data.
This is a far cry from the highs in March, when the yield on that Catalan bond hit 5.21 percent and the spread over Spanish government bonds was 493 bps.
Spanish bonds are rated BBB+ by S&P — six notches higher than their Catalan equivalents.

RISK NOT GONE AWAY
Home to 7.5 million people, Catalonia has its own language and distinct culture, as well as a long-standing industrial tradition and a thriving tourism sector.
Pro-independence parties won a majority of seats in its regional assembly a year ago but fell short of taking more than half the votes, raising questions about how clear cut support for independence is.

The conservative caretaker national government, led by Prime Minister Mariano Rajoy, has resorted repeatedly to legal blocks via the constitutional court to halt the push for independence.
In the June election rerun, Rajoy's People's Party emerged with a larger bloc of seats, even though the outcome was still a hung parliament.
"If there's a new coalition government in Madrid agreed in the next few weeks or even in the case of a third election, it seems like it will be led by the centre-right People's Party," said Daniel Lenz, a DZ Bank strategist.
"That again means (Catalan) independence is more unlikely, because it is only the left parties that have been receptive for a referendum on independence," he said.
Support for independence has ebbed and flowed since surging in 2012 at the height of Spain's economic crisis and after attempts to gain more autonomy were knocked back.
Squabbling between separatist parties has in part dampened enthusiasm, while many have doubts about whether leaders can truly deliver independence for next year as promised.
However, one poll published in July showed support for independence edging ahead of those against it for the first time, though it remained below 50 percent.
Teneo Intelligence analyst Antonio Barroso cautioned against reading too much into the reduced turnout for last weekend's independence protests.
"In the past this issue has been much more in the spotlight so the turnouts were higher. It only takes another episode for everything to flare up again," he said.
Many analysts expect tensions between Barcelona and Madrid to escalate in the coming months, at Catalan leaders come under pressure to press ahead with planning a split from Spain.

Source: Arab News