September 12, 2017 / 7:50 AM / a year ago

UPDATE 2-Spain/Italy bond yield gap tight as Catalan worries grow

* Spain-Italy bond yield gap tightest since late June

* Austria launches sale of 100-year bond

* ECB’s Constancio due to speak

* Euro zone periphery govt bond yields (Writes through)

By Abhinav Ramnarayan

LONDON, Sept 12 (Reuters) - The gap between Spanish and Italian government borrowing costs held near its tightest level in more than two months on Tuesday on growing concerns over a looming independence vote in the Spanish region of Catalonia.

Euro zone bond yields were broadly higher because of increased supply and waning tensions in other parts of the world.

But investors worried that the Catalan plebisite, if it takes place as planned on Oct. 1, could pile more pressure on Spain’s minority government, and even undermine an economic recovery.

Madrid has declared the vote illegal and taken steps to obstruct it in the courts. “Though Madrid is doing its best to stop the independence bid, it will still get a lot of attention,” said DZ Bank strategist Daniel Lenz.

Some investors were switching from Spanish to Italian government bonds as a result, he added.

“It could eventually become a huge problem for companies and taxpayers, and there is the prospect of Spanish troops going into the (Catalonian) region, even,” he said.

The Spain-Italy 10-year government bond yield spread tightened to 50.7 basis points in early trade on Tuesday, the tightest level since June 19.

It held near that level, though pressure on Spanish yields eased a bit as the session wore on.

Most euro zone bond yields were 3-4 basis points higher on the day, on increased bond supply. Relief that North Korea did not conduct another missile test at the weekend also hurt safe-haven assets.

“The selling is mostly supply led but an improvement in sentiment towards the North Korea situation and the relatively low impact of the hurricane in the U.S. are also driving the market,” said Mizuho strategist Antoine Bouvet.

Increased supply tends to push yields higher as investors sell their existing holdings to make space for the new bonds.

Austria launched the sale of a 100-year bond on Tuesday after overwhelming investor interest gave its debt officials confidence it could become the first euro zone country to sell a “century” bond publicly through a group of banks.

In addition, the Netherlands sold 2.2 billion euros of 10-year government bonds on Tuesday while Germany sold 0.357 billion euros in a top up of its 0.10 percent, 2046 inflation-linked bond.

European Central Bank Vice President Vitor Constancio will speak at a conference later in the day, and investors will look for further clues on how rapidly the bank will unwind extraordinary monetary stimulus.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=

Reporting by Abhinav Ramnarayan; Editing by Mark Trevelyan and Andrew Heavens

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