Peripheral bonds could not keep up with core markets the past week. Spreads to Germany widened as 10 year German Bunds continued their relentless rally and touched -0.09%.
01.04.2019 | 10:02 Uhr
A level not far from the -0.19% low seen in July 2016. On Friday, Prime Minister’s May Brexit withdrawal agreement was rejected by the UK parliament for the third time. This makes a long extension more likely, if not, a hard Brexit on April 12th will follow. Italian bonds have returned 1.7% year-to-date, Spanish bonds 1.4%, Portuguese bonds 1.2% and Irish bonds 1.8%.
Business sentiment in Italy posted the first gain in 10 months, but the
manufacturing sector remained weak. As the Italian economy is still relatively
manufacturing driven, weakness in manufacturing could extend the current mild
recessionary environment. This implies the 2019 budget deficit could
significantly exceed the 2% agreed target with the European commission in
December last year.
Spain
Standard and Poor’s maintained Spain´s rating at A- and kept the positive outlook
last Friday. Uncertainties over the next elections refrained S&P from
upgrading Spain. A fragmented election outcome beckons and the risk that the
tensions with Catalonia flare up again lingers. Especially if in the end a
conservative government is established.
ECB’s Draghi on Wednesday signalled risks to the Euro area economy remain to
the downside. Moreover, he hinted that the ECB was looking into a tiering
system on central bank deposits. A tiering in deposit rates is seen as less
punitive to banks and partly addresses the negative side effects on banks
profitability. It perhaps also opens the door to further policy rate easing, if
needed. For now, however, it seems the main policy tools will remain the
re-investments of the asset purchase program, the extended forward guidance and
the upcoming third TLTRO.
Robeco Euro Government Bonds
In Italy we implemented a 10-30yr flattening position. The 10-30s Italian curve has re-steepened to levels last seen in May 2018. In a more adverse scenario where Italian yields rise significantly, longer dated bonds are expected to outperform the 10yr segment. Overall the fund remains defensively positioned and is underweight the periphery. We took the opportunity of the recent rally in France to reduce the overall overweight in semi-core bonds. The fund’s investments in peripheral bonds are at circa 32%, about 8% below the level of the index. Year to date the absolute return of the fund is 2.68%*.
* Robeco Euro Government Bonds, gross of fees, based on Net Asset Value, 22nd March, 2019. The value of your investments may fluctuate. Past results are no guarantee of future performance.
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