Robeco: Peripheral Europe Update

Portuguese spreads continued a decreasing trend that started at the beginning of April. Dovish comments from ECB policy makers and low euro-area inflation numbers, pushed German yields lower and provided some support for total returns. Italian bonds have returned -1.48% this year, Spanish bonds 0.0%, Portuguese bonds 6.90% and Irish bonds -0.22%. 

Italy 

The main political parties have reportedly found agreement on the electoral law, which is a prerequisite to call early elections. The agreement is not formalized yet as details still need to be worked out and the agreement needs to be signed into law. Last Sunday, PD leader Renzi mentioned that September 24 would be a suitable date for elections, mentioning that it would be better to start quickly with a new mandate. Although some 5 Star Movement MPs have demanded last minute amendments, also the 5 Star Movement reportedly agreed to organizing early elections. 5 Star expects to gain significantly in these elections and potentially become the largest party in parliament.

Spain

The minority government managed to find enough votes in the lower house to agree on the 2017 budget. Two votes from the Canary Islands were required to come to a majority. The budget still foresees a deficit of 3.1% in 2017. The next phase is to pass the budget in the Senate. This should be a smooth process as the ruling PP party holds an absolute majority in the Senate. 

Greece

Recent data on Greek bank deposits indicate that private sector deposits continued a decreasing trend. Total deposits stood at almost 119bn at the end of April, the lowest level in 16 years. Especially corporate deposits declined. Households deposits saw a marginal increase, but total households deposits have still not recovered from a drop to historical low levels in 2015. These developments show that the private sector is still in disarray.

Robeco Euro Government Bonds

This week we closed the overweight position in Italian versus Spanish bonds. The risk of early elections in Italy has clearly increased over the past days. Therefore, chances have grown for the Italy – Spain spread to break out of the recent range. We maintain our overweight position in Ireland. Irish bond spreads are attractive given the improved Irish fundamentals and its strong ESG scores. Currently the fund is 40% invested in peripheral bonds, in line with the index. Year-to-date the fund’s absolute return is -0.44%*.