December 22, 2017 / 12:08 PM / 6 months ago

UPDATE 2-Spanish bonds wobble after surprise Catalan separatist victory

* Spanish govt bond yields rise 5 bps in early trade

* Euro dips 0.2 pct as separatists win Catalan vote

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Rewrites top, updates prices)

By Fanny Potkin

LONDON, Dec 22 (Reuters) - **There will be no bond market report on Dec 25 and Dec 26 due to UK holidays**

Spanish government bond yields hit a one-month high in early trade on Friday after Catalan separatists looked set to regain power in a regional election, though the initial knee-jerk reaction was largely reversed as the session wore on.

Separatist parties won a slim majority in Catalan parliament in the election on Thursday, deepening the nation's political crisis in a sharp rebuke to Prime Minister Mariano Rajoy and European Union leaders who backed him.

It sets the stage for the return to power of deposed Catalan president Carles Puigdemont who campaigned from self-exile in Brussels and faces arrest if he were to return home.

"This result suggests that the political uncertainty in this region is still a long way from being dispelled anytime soon," said BBVA strategist Jaime Costero Denche.

Spain's 10-year borrowing costs rose 5 basis points to a one-month high of 1.52 percent in early trades, before dropping back to 1.47 percent by the close.

The premium investors demand for holding Spanish bonds over top-rated German peers widened 6 bps to around 111 bps at one stage.

The euro dipped to $1.1817 early in the day, before trimming its losses to trade at $1.1835.

Spain's main stock index fell 1.1 percent at the open and Banco Sabadell and Caixabank, which have the biggest exposure to Catalonia and moved headquarters after October's independence referendum, sank 2.7 to 3.4 percent, the top fallers.

However, Costero Denche of BBVA said that he does not expect this pessimism to last.

"The results have not deviated significantly from what the voting intention surveys had been anticipating," he said, adding that the sell off is likely only an initial knee-jerk reaction.

Other Southern European government debt also sold off on the day. Most notably, Portugal's 10-year borrowing costs rose as much as 10 bps to hit week's high of 1.874 percent before settling at 1.85 percent.

"I thought Portugal was looking a bit stretched in terms of how far below (Italian) BTPs it was trading, so maybe its an end of year closing out of Portuguese longs after a really good run since September," said Rabobank strategist Richard Maguire.

Portuguese yields have dropped sharply all year, a trend that accelerated in September after it was upgrade to investment grade status by S&P Global, a move followed by fellow ratings agency Fitch earlier this month.

This culminated in the Portuguese 10-year borrowing costs dropping below the Italian equivalent earlier this week for the first time since January 2010.

Core euro zone government bonds opened slightly stronger on Friday, with the yield on Germany's 10-year government bond, the benchmark for the region, edging marginally lower to 0.41 percent.

U.S. Treasury yields held at slightly higher levels on Friday as data on durable goods orders and personal spending in November supported the view of solid domestic economic growth in the fourth quarter.

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 Fanny Potkin, Additional reporting by Abhinav Ramnarayan; Editing by Toby Chopra

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