October 19, 2017 / 7:57 AM / a year ago

Spanish bonds outperform as investors look for Catalan stability

* Spain’s 10-year yield dips 1.5 bps ahead of Catalan deadline

* Spanish bond auction to provide further test of sentiment

* Most euro zone yields edge lower as ECB “blackout” period begins

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

By Abhinav Ramnarayan

LONDON, Oct 19 (Reuters) - Spanish government bonds outperformed the rest of the market ahead of a key deadline on Thursday morning as investors greeted Madrid’s decisive stance towards Catalonia’s secessionist leadership with a measure of relief.

In an unprecedented move since Spain returned to democracy in the late 1970s, Prime Minister Mariano Rajoy will impose direct rule in Catalonia unless the region’s leader Carles Puigdemont retracts by 10 a.m. (0800 GMT) an ambiguous declaration of independence he made last week.

Political tensions have pushed Spain’s borrowing costs sharply higher in recent weeks, and though tensions are sure to ratchet up as Thursday’s deadline passes, investors are hoping Rajoy’s uncompromising stance will bring some stability to the region.

“Investors are taking the view that if Spain takes control of Catalonia today, it is better to have some stability than the uncertainty of a potential independence bid,” said DZ Bank strategist Daniel Lenz.

The euro also gained on the day, and was up 0.2 percent by 0715 GMT .

The yield on Spain’s 10-year government bond was 1.5 basis points lower at 1.62 percent in early trade, while other Southern European bond yields were flat to a touch lower.

Analysts pointed out, however, that this outperformance only comes after two weeks of selling.

The gap between Spanish and German 10-year borrowing costs, at 122 basis points, is now 23 basis points wider than at this point a month ago.

In what promises to be a more comprehensive test of investor sentiment, Spain is scheduled to sell 4-5 billion euros of bonds of various maturities in an auction at 0830 GMT; half an hour after Catalonia’s deadline.

“There is potential for some volatility as these auctions take place and if political headlines hit the screens as well,” said Lenz of DZ Bank.

Most euro zone bond yields edged lower on Thursday, as the “blackout” period began ahead of next week’s key European Central Bank meeting, when policymakers are expected to provide detail on the unwinding of monetary stimulus.

Most yields have dropped in recent sessions on expectations that the ECB will continue asset purchases for longer than many expected, albeit at a lower level.

Germany’s 10-year government bond yield, the benchmark for the bloc, was a touch lower at 0.39 percent; well off the 0.50 percent it was yielding at the start of the month.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets

Reporting by Abhinav Ramnarayan; Editing by Gareth Jones

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