Euro zone bond yields have fallen today, with Spanish bonds underperforming most of their peers after the wealthy region of Catalonia saw its ratings downgraded further into junk territory.
Standard & Poor's cut Catalonia's credit rating one notch to B+ on Friday, after a previous downgrade in October.
The rating agency cited weakening financial management and maintained a negative outlook on the region where a drive towards independence from Spain has grown.
S&P's move reflects persistent worries about the financial health of Spain's regions and raises concerns about the sovereign's own ratings outlook, analysts said.
Spain, which has yet to form a new government after an inconclusive election on 20 December, has been warned several times by the European Commission that it needs to do more to cut its deficit this year.
"Catalonia's downgrade within already 'junk' territory and the outlook still being negative highlights that the situation gets worse with time passing," said Commerzbank rates strategist David Schnautz.
"The downgrade of Catalonia is a very bad omen for S&P's upcoming review of Spain on 1 April."
S&P rates Spain BBB+, with a stable outlook.
Spain's acting government aims to enforce stricter controls over regional finances as it seeks to convince Brussels it can keep the budget deficit in check, Economy Minister Luis de Guindos said in an interview published on Sunday.
Spain's 10-year bond yield is down two basis points at 1.43%, but lagged most of its counterparts which fell between 2.5 and 9 bps.
Meanwhile, Catalan bonds saw some of their highest yields in about two years in the secondary market.
The yield on five-year Catalan bonds, the most liquid segment of the Catalan curve, traded at almost 4.64% compared with 3.91% on Friday, according to Reuters data.
Peter Chatwell, head of European rates strategy at Mizuho, said that while there was a bit of underperformance in Spanish government bonds, market reaction was unlikely to be significant unless the relationship between Catalonia and the central government "fundamentally" breaks down.
In addition, an expansion in ECB monetary stimulus and plans to provide a new round of cheap loans to banks was seen supporting Spanish markets.
The stimulus package unveiled this month and expectations that interest rates may be cut further continued to bolster bond market sentiment.
Germany's 10-year Bund yield is down 2.5 bps at 0.20%.
Italian 10-year yields fell to within sight of Friday's one-year low at 1.24%, while Greek 10-year yields tumbled 9 bps to 8.6% - their lowest level in about two months.
