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Investors in Spanish government bonds should focus on Catalan vote - ING

FXStreet (Łódź) - James Knightley from ING urges investors in Spanish government bonds to pay more attention to the risks connected with the Catalan independence vote.

Key quotes

"It has been quite a challenge to digest the newsflow coming out of Catalonia in recent days. Late on Monday, the regional government called off the popular vote on independence scheduled for 9 November saying that there was no legal support for the vote, which had previously been suspended by Spain’s Constitutional Court after the government contested it."

"But yesterday the head of Spain's Catalonia's region, Artur Mas, said a non-binding consultation would still be held on 9 November, albeit under a different legal framework, while adding that 'the vote can be considered the preparatory vote before the definitive one'. The 'definitive' vote, he explained, would be a new election in Catalonia."

"While it is uncertain that the watered-down vote will indeed see the light of day, one thing seems clear: the Catalan government (and indeed many Catalan people) seem determined to continue their push for more autonomy."

"So far, investors in Spanish central government bonds do not seem overly concerned about the risks surrounding the Catalan desire for (more) independence. Spreads between Spanish and government bonds have remained at or below the levels seen the day after the Scottish independence result."

"However, the gap between yields on Catalonian and Spanish government debt has widened further (although yesterday’s news led to some spread tightening, see right-hand chart)."

"Our central scenario is that if a vote, even a watered-down one, will not proceed, early elections will indeed be called. Against this backdrop it might be difficult for Spanish government bonds to continue to outperform their peripheral peers over the coming months."

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