28.08.2017 | 12:51

Robeco: Berlusconi in favor to reintroduce the Lira

In Itali grows a tendency towards an own currency while German central bank prefers to end QE quickly - the market view from Olaf Penninga and Marc Bulter, both members of the robeco Global Fixed Income Macro team.

Main market events
Peripheral bonds had a difficult week as spreads widened significantly. The move was led by Portuguese, Italian and Spanish spreads and Irish bond only widened marginally. The trigger for the wider spreads was a newspaper article at the beginning of the week where Berlusconi argued for the introduction of a parallel currency in Italy. German yields closed the week almost at the same level as the start of the week. The main event for this week is the annual central bankers meeting in Jackson Hole. Draghi is scheduled to speak today. Although not expected, Draghi could surprise the market as he did in Sintra last June. Italian bonds have returned -0.39% this year, Spanish bonds 0.73%, Portuguese bonds 8.18% and Irish bonds 0.30%.

On Monday the Italian newspaper Libero Quotidiano published an interview with Forza Italia party leader Berlusconi. He claimed to be in favor of a dual currency. According to Berlusconi, a second funding currency, parallel to the euro, makes it possible to take back monetary sovereignty and print money to support the Italian economy. A parallel currency is, according to Berlusconi, compatible with current European Treaties. Berlusconi further mentioned that a centre-right alliance (Forza Italia and Lega Nord and a smaller party) is near completion and a joint programme for the upcoming elections will be published in September. This shows that the anti-euro stance in Italy is gaining traction, as 5 Star Movement also comes from an anti-euro background. Together they represent 2/3 of the Italian electorate. Italian political risks remain therefore elevated.

Weidmann, Governor of the Bundesbank, mentioned in a German newspaper that he prefers a quick and orderly exit of the ECB’s QE program. He expects inflation to rise further from the current level and that additional support from the ECB is therefore not necessary. It’s very likely that Weidmann will be outvoted as most other central bank governors within the Eurozone prefer to continue with the QE program in 2018.

Robeco Euro Government Bonds
We have slightly increased the underweight position in Italian bonds, specifically bonds with a relatively short maturity. The underweight position in Spain remained unchanged. Spreads are close to the post-crisis lows, especially for Spain, while the market has to adjust to the gradual phasing out of the ECB’s bond buying program. Italian spreads are somewhat higher, but here fundamentals remain weaker and political risk will rise. Currently the fund is 25% invested in peripheral bonds compared to 40% in the index. Year-to-date the fund’s absolute return is -0.14%*.

* Robeco Euro Government Bonds, gross of fees, based on Net Asset Value, YTD August 24, 2017. The value of your investments may fluctuate. Past results are no guarantee of future performance.