October 27, 2017 / 4:33 PM / a year ago

UPDATE 1-Catalan crisis hits Spanish bonds, stocks and CDS

* Catalan worries exclude Spain from post-ECB rally

* Spain-Germany bond yield spread widens to 120 bps

* Cost of Spanish sovereign, bank CDS rises

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Writes through)

By Abhinav Ramnarayan

LONDON, Oct 27 (Reuters) - Spanish stocks and government bonds sold off on Friday after Catalonia’s parliament declared independence and the Spanish government moved to impose direct rule, deepening a political crisis.

“Tensions are likely to rise significantly over the coming days,” Antonio Barroso of Teneo Intelligence said in a note.

“Demonstrators might try to prevent the police from removing Catalan ministers from their offices if the central government decides to do so. This increases the risk of violent clashes with the police.”

The yield on Spain’s 10-year government bonds — which move inversely to price — was up 2 basis points at 1.58 percent on a day when most other euro zone yields were sharply lower following Thursday’s ECB meeting.

The gap between Spanish and German 10-year government bond yields widened 8 bps to 120 bps.

The cost of insuring exposure to Spanish sovereign and bank debt through credit default swaps (CDS) also rose.

Spain’s IBEX share index fell as much 2.1 percent to a four-day low and euro zone banking shares as much as 1.8 percent.

“So far the political risk in Spain has played out predominantly in the IBEX, showing that investors consider it to be a domestic issue. However today, I think we are starting to see the negative sentiment also hit the euro,” said Fiona Cincotta, an analyst at City Index.

The euro hit the day’s low at $1.1574 and was down 0.6 percent on the day.

The European Central Bank’s announcement on Thursday that it will extend its monetary stimulus programme until at least next September fuelled a broadly positive mood on euro zone markets.

Apart from Spain, most euro zone government bond yields were lower 5-7 bps, extending Thursday’s falls. The yield on Germany’s 10-year government bonds, the benchmark for the region, fell 6 bps to 0.38 percent.

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 John Stonestreet)

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