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By Bloomberg

The battle over the future of Scotland risks tainting U.K. government bonds for years to come.

Scots' rejection of independence last week failed to dispel concern that political turmoil is set to continue as Prime Minister David Cameron promised to match more financial powers for Scotland with greater autonomy for other regions of the U.K. And should he retain power next year, Britain faces a referendum on whether to quit the European Union, its biggest export market.

Ten-year gilt yields ended last week close to an almost seven-week high after Scots voted to retain the 307-year union with England by 55.3 percent to 44.7 percent in the referendum.

"Uncertainty tends to play into premia being priced in, and in the 10-year sector that's where you see a lot," Simon Peck, a rates strategist at Royal Bank of Scotland Group Plc in London, said after the results were declared.

Gilts declined in the past three weeks, paring their return this year to 6.6 percent and trailing all euro-area sovereign markets, according to Bloomberg World Bond Indexes. The 10-year yield fell two basis points to 2.52 percent at 8:51 a.m. London time today. That left the spread over equivalent German bunds at 149 basis points, close to the widest since 1997.

Constitutional Wrangling

Cameron vowed to stick with his promise to cede more powers over tax and spending to the Scottish Parliament, and said England, Wales and Northern Ireland needed more control over their affairs, raising the specter of years of constitutional wrangling. Labour opposition leader Ed Miliband called for a cross-party constitutional convention next year.

"Further devolution should mean that another referendum is very unlikely in the foreseeable future," said Azad Zangana, an economist at Schroder Investment Management Ltd. in London. "However, long-term investors will be minded of the risk of separation and may demand a premium."

For analysts Fergus McCormick and Giacomo Barisone at rating company DBRS Ltd., victory for the anti-independence "no" campaign in Scotland does not mean a return to normality.

"The promise of greater devolution of powers to Scotland, the possibility of another referendum and uncertainties over long-term investment projects in Scotland could perpetuate uncertainty," they wrote in a Sept. 17 e-mailed report.

Election Looming

The negotiations with Scotland come with less than eight months to go before the general election. If the Conservatives win, Cameron has vowed to negotiate more favorable terms for Britain in the EU and put the results to a popular vote by the end of 2017.

Speaking at a press conference after his defeat, Scottish First Minister Alex Salmond vowed to hold Westminster political parties to their pledges and said his Scottish National Party would continue to argue for independence. Salmond said he's stepping down.

"The political environment will become more factious," Salman Ahmed, global strategist at Lombard Odier Investment Managers in London, said on Sept. 17. "A lot of people will change the way they look at U.K. assets."