Catalonian referendum slams Spanish bonds but leaves rest of Europe unscathed
By Sunny Oh
Catalonia held its independence referendum over the weekend
Dismissed as a non-event by investors, the Catalonian independence referendum turned out to be the worst outcome for the Spanish government and its bondholders after its sovereign paper saw significant selling Monday.
Spanish Prime Minister Mariano Rajoy sent the national police into Catalonia to prevent the region from holding a referendum on its secession. But Madrid's heavy-handed tactics left hundreds of voters injured and public opinion sour. The outbreak of violence has raised fears that those in favor of the political divorce might be emboldened by the central government's reaction, while those on the fence will swing toward the secessionist camp.
See: Chaos, violent clashes after Catalans go to the polls in vote that could split Spain (http://www.marketwatch.com/story/chaos-clashes-and-hundreds-of-reported-injuries-as-catalans-go-to-the-polls-in-vote-that-could-split-spain-2017-10-01)
"I think what people [who downplayed the referendum] got wrong was Madrid's reaction. Madrid was way more aggressive than we had expected. It's a bit of a PR nightmare for Madrid and Rajoy," said Patrick O'Donnell, senior portfolio manager at Standard Life Aberdeen.
Yet even as Spanish government bonds tumbled, other European markets shrugged off the geopolitical concerns even though the vote could open the door for further political upheaval in the European Union. The STOXX Europe 600 index rose 0.5% to end at 390.13, its eighth consecutive gain.
The Spanish 10-year government bond yield climbed around 9 basis points to 1.694%, pulling prices lower. This widened the so-called yield spread between it and other equivalent German bonds , which represents the premium investors demand for taking on more credit risk from buying debt from weaker regional economies like Spain, compared with stronger members like Germany.