October 16, 2017 / 7:46 AM / a month ago

Spanish bonds, stocks sell off as Catalan ultimatum looms

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

By Abhinav Ramnarayan

LONDON, Oct 16 (Reuters) - Spanish bonds and stocks sold off on Monday as Catalonia’s leader failed to spell out his stance on independence minutes before a deadline from Madrid to do so, sweeping away calm generated last week by soothing messages from the ECB.

Carles Puigdemont’s silence over the ultimatum, which paves the way for the central government to take control of the region and rule it directly, put political risk back at the head of the investor agenda.

Late last week, euro zone bonds had rallied market after the bloc’s monetary policymakers suggested extraordinary stimulus measures would remain in place for longer than some had expected.

But this move was reversed in Spanish and Italian bonds on Monday. The yield -- which moves inversely price -- on Spain’s 10-year government bond rose 2 basis points and the spread over German equivalents widened by a similar amount.

Spain’s IBEX share market index was down 0.8 percent in early deals, lagging the broader European market with financials weighing most. Spanish banks Caixabank, BBVA, Bankia and Banco Sabadell were down 1 to 1.9 percent.

“The focus has been on the ECB in the last few sessions but Catalonia is centre stage today. Yields are edging higher for this reason,” said DZ Bank strategist Sebastian Fellechner.

German government bond yields stayed near lows hit last week after a Reuters report that European Central Bank policymakers had broadly agreed to extend their bond-buying scheme into next year while scaling it back.

ECB ratesetters are moving towards announcing more asset purchases at lower volumes at their October policy meeting, with views converging on a further nine months, five people with direct knowledge of the discussion told Reuters.

Germany’s 10-year yield, the benchmark for the bloc, was flat at 0.41 percent and close to the bottom of the 0.40-0.50 percent range it has traded in in recent weeks.

Currently, the ECB buys 60 billion euros of assets in a scheme that runs until the end of the year.

Analysts are now questioning how much the ECB will buy and for how long next year before bringing the programme to a close.

“Draghi & co will get the opportunity to put market expectations right ahead of the blackout period,” analysts at Commerzbank said in a note.

They said they expected Germany 10-year yields to establish a new range between 0.40-0.45 percent in light of changed policy expectations.

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, Additional reporting by Helen Reid; editing by John Stonestreet

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