* Spanish, Italian and Portuguese yields edge higher ahead of ECB
* German 10-year bond yield stays near top of recent range
* Catalonia tensions rumble on, Italy vote on electoral law looms
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
By Abhinav Ramnarayan
LONDON, Oct 26 (Reuters) - Southern European government bonds underperformed a touch as political events in Italy and Spain provided the backdrop to Thursday’s key ECB meeting, when policymakers are expected to cut back on extraordinary stimulus.
Most European government bond yields were largely unchanged on Thursday but Italian, Spanish and Portuguese bond yields rose 1-2 basis points.
Political events may be proving a drag on their debt, as tensions between Madrid and Catalonia rumble on and Italy reforms its electoral law.
These lower-rated Southern European countries are also seen as the biggest beneficiaries of the ECB’s bond-buying scheme, so they are the most vulnerable to a reduction in bond purchases.
The ECB currently buys 60 billion euros of assets a month in a scheme due to run until the end of the year. Analysts expect the bank to extend the programme at a reduced rate, with most views centring around 30 billion euros of purchases month for nine months.
“We are already in the ‘sell the rumour’ mode on 10-year German Bunds but not so much in the periphery and the semi-core, so we could see some spread widening (if the ECB reduces purchases),” said ING strategist Benjamin Schroeder.
The yield on Germany’s 10-year government bonds , the benchmark for the bloc, was trading at 0.47 percent, down a basis point on the day but close to three-week highs of 0.49 percent hit on Wednesday.
The gap between Spanish and German 10-year borrowing costs widened to 117 basis points.
“Given the issues around Catalonia and the potential for a unilateral declaration of independence, I don’t know why there isn’t even more of a reaction,” said Schroeder of ING.
Catalan leader Carles Puigdemont kept friends and foes guessing on Wednesday on whether he intends to unilaterally declare independence as the Spanish government prepares to impose direct rule to stop the region breaking away.
Meanwhile, the Italian government won all five confidence votes it had called in the upper house of parliament on Wednesday on a new electoral law, with a final vote due on Thursday.
ING analysts believe the passage of the new law would likely encourage talk of new elections to be held in March 2018 or possibly sooner.
However, given that the ECB’s purchases of government bonds have been the single most dominant factor in southern European borrowing costs over the past two years, this is by far the most significant event of the day.
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Reporting by Abhinav Ramnarayan; Editing by Robin Pomeroy