Robeco: Draghi lives up to reputation and delivers

Main market events

Markets were under a bit of pressure in the run up to Thursday’s ECB meeting, as several hawkish members pushed back against “overdone” market expectations, but as always, Mario Draghi lived up to his reputation and presented the market a comprehensive stimulus package as farewell gift to his 8-year term as ECB President. Especially Italian government bonds rallied significantly after this announcement. Italian bonds have returned 14.2% year-to-date, Spanish bonds 10.4%, Portuguese bonds 10.0% and Irish bonds 7.8%.

ECB

On Thursday Mario Draghi laid out a  comprehensive stimulus package which consists of: a cut in the deposit facility rate by 10bp to -0.5%, a restart of net asset purchases at a monthly pace of EUR20bn from 1 November, slightly more generous terms in the seven upcoming quarterly TLTROs and the introduction of a two-tier system for reserve remuneration. Especially the open-ended nature of the QE-II program was a dovish surprise to markets. Draghi strongly emphasized the need for fiscal stimulus going forward, a message that will likely be echoed by Christine Lagarde when she takes over from Draghi as per November.

Italy

Prime minister Conte won the final confidence vote in the Senate on Tuesday. Most M5S and PD senators supported the new government. The new government intends to change the electoral law to make it a pure proportional representation system, which would reduce the chances of a right-wing, Lega-led government to emerge after the next election.

Spain

Coalition talks between the socialist PSOE and the left-wing Podemos to form a government broke down this week. Parties have until September 23 to appoint a Prime-minister, otherwise congress will be dissolved and new elections will be held, likely around November 10. The latest opinion polls suggest PSOE may increase its number of seats in a new election, but not by enough to avoid the necessity to find a coalition partner.

Robeco Euro Government Bonds 

Ahead of the ECB meeting, we used the small setback in spreads to slightly add to Italy exposure, expecting Draghi to deliver despite all the hawkish comments. Next to that, we switched Portugal into Spain, as the yield differential has declined to nearly zero, so we prefer to improve liquidity in the fund without compromising on spread potential. The fund currently has significant overweight positions in Italy and Spain versus the index, and limited overweight positions in Portugal and Ireland. 50% of the fund is invested in peripheral bonds, which is 9% above the level of the index. Year to date the absolute return of the fund is 9.96%*.

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