Robeco: Peripheral Europe Update, week 28

Greece election results confirms swing to centre-right.  

Main market events

After last week’s buying frenzy, peripheral spread-tightening took a breather. The 10yr BTP-Bund spread held its ground, despite widening early in the week, but Iberian bonds clearly underperformed Germany. Profit taking took SPGBs and PGBs bond yields higher. The strong out-performance of BTPs is also reflected in YTD total returns versus its peers. BTPs, in just a few weeks, managed to make up all lost ground versus both Portugal and Spain. Italian bonds have returned 8.0% year-to-date, Spanish bonds 8.1%, Portuguese bonds 7.9% and Irish bonds 6.0%.

Italy

BTPs defied gravity as expectations of ECB rate-cuts, a restart of QE and the decision not to open an EDP continued to outshine fundamental concerns. Despite better-than-expected industrial production for May, the Bank of Italy still sees GDP unchanged or marginally down in 2Q. Notably, the sharp EUR 40bln drop in the Bank of Italy’s Target2 liabilities to the Eurosystem in June confirmed foreign investors returned to buy BTPs after Draghi’s dovish speech in Sintra Portugal in mid-June. 

Greece

In Greece the political landscape changed significantly last weekend. The landslide victory for the  centre-right party New Democracy hints at a business- friendly government, which could bode well for growth prospects. Greece’s rating outlook consequently could benefit. Early August Fitch (BB-) kicks-off, with Moody’s (B1, ) to follow later in August and S&P (B+) in October. 

ECB

The ECB is still on course for policy easing. Minutes of the June governing council meeting (held pre-Sintra) were broadly as expected. The mood in the governing council reflected concerns around weak inflation and growth. There was broad determination to act. In our view the ECB indeed will follow up with action and at the upcoming July meeting could already either cut rates or pre-announce a rate-cut.

Robeco Euro Government Bonds 

The fund closed its underweight in Spain and on Friday, as SPGB yields spiked higher, a small tactical long was implemented. The fund reduced part of the BTP overweight locking in a profit. After the massive rally in both the periphery and semi-core risk was reduced slightly. Nevertheless we believe the outlook for spreads remains favorable given the supportive ECB backdrop remains in place. As a percentage of market value, investments in peripheral bonds are at 38%, which is 3% below the level of the index. Year to date the absolute return of the fund is 6.41%*.

* Robeco Euro Government Bonds, gross of fees, based on Net Asset Value, 12 July, 2019. The value of your investments may fluctuate. Past results are no guarantee of future performance.