Main market events
Peripheral bonds clearly outperformed German bonds this week. It was a strong week for eurogovernment bonds, with Spanish 10-year yields declining by 14 basis points. Portuguese bondshave returned 4.5% this year, Italian bonds 4.8%, Irish bonds 1.8% and Spanish bonds 2.3%.
European Central Bank
The ECB did not take any new measures this month, but President Draghi strongly suggested thatthe ECB will ease policy further in December. Draghi stated that a rate cut is possible, while lastyear the current rate level was described as “effectively the lower bound”. The possibility toincrease or extend the Quantitative Easing program was also stressed.
President Cavaco Silva has asked the incumbent center right Prime Minister Passos Coelho toform a new government. He deemed a coalition including “anti-European forces” (the smallerleft-wing parties) unfit to guarantee a stable, durable and credible government.
The center-right party is the largest party, but the center-left and left parties together won themajority of seats in the recent elections.
The EU commission warned Portugal that it needs to submit the 2016 budget plans within a fewdays, as elections are no excuse for the delay.
Spanish unemployment fell to 21.2% in the third quarter, from 22.4% in Q2.
The Catalan pro-independence party Popular Unity Candidates (CUP) reiterated that it will notsupport a government led by the current leader of the single pro-independence list Artur Mas.Without CUP there is no majority in favor of the independence drive in the Catalan parliament.
Robeco Euro Government Bonds
We continue to see the ECB’s QE program, the generally supportive stance of EU policy makerstowards the periphery and the improvement in growth as positives for peripheral debt. On the other hand risk aversion in wider financial markets (related to emerging markets, commoditiesand weaker global growth) can weigh on the periphery.
The fund has overweight positions in Portuguese, Spanish and Irish bonds and an underweightposition in Italian bonds. Portugal benefits disproportionately from QE and Spain’s recentunderperformance due to election concerns is overdone. Strong economic growth is rapidlyimproving the Irish debt metrics. Peripheral bonds make up 34% of the fund. Year-to-date thefund’s absolute performance is 2.19%.