Robeco: Escalating tensions between Madrid and the Catalan separatists

Main market events
Peripheral spreads tightened somewhat this week following several speeches of ECB officials reinforcing forward guidance to anchor expectations that interest rates will remain very low for a long period of time well after the net purchases are over. The emphasis was also on the overall monetary stance, stressing policy rate, forward guidance, asset purchases and other non-active measures. Italian bonds have returned -0.01% this year, Spanish bonds 0.55%, Portuguese bonds 8.19% and Irish bonds 0.67%. 

Italy
The Bank of Italy this week released data showing a substantial fall in bad loans of 18.3 billion in July. The bulk of it has been sold by Unicredit to two major investors at an average price of about 13% of the nominal value of the loans, triggering a significant loss relative to the book value. On the political front, despite shared anti-euro affinities with the Northern League, the most likely candidate for the populist M5S said his party aims at running individually ahead of the 2018 election. Di Maio intend indeed to head a minority government. 

Spain
Tensions are escalating between Madrid and the Catalan pro-independence government. Public prosecutors have started the investigation again those majors who pledged support for the organization of the self-determination referendum. Spanish PM Rajoy warned that participating in the referendum would be an illegal act. Ignoring the various threats, the Catalan side sticks to its plan and has launched campaign for 1 October. At this stage, it is not clear whether Madrid will allow the illegal vote to take place or use extreme measures to prevent it. 

Greece
Strains with Greece’s international creditors are likely to heat up again, when technical teams will return to Athens on Monday next week. The lack of progress in labor reforms and a controversial VAT rate cut do not bode well for the next bailout review. Despite the recent improving economic sentiment, the better than expected fiscal results and the return of some domestic liquidity, a lifting of capital control is unlikely in the near future.   

Robeco Euro Government Bonds
We have maintained the underweight position in Italian and Spanish government bonds. Spreads are close to the post-crisis lows, especially for Spain, while the market has to adjust to the gradual phasing out of the ECB’s bond buying program. Italian spreads are somewhat higher, but here fundamentals remain weaker and political risk is rising. Currently the fund is 25% invested in peripheral bonds compared to 40% in the index. Year-to-date the fund’s absolute return is -0.32%*.

* Robeco Euro Government Bonds, gross of fees, based on Net Asset Value, YTD September 14, 2017. The value of your investments may fluctuate. Past results are no guarantee of future performance.