dovish ECB meeting also supported country spreads. What is more,
stabilizing European growth data reinforced hopes that Europe can avoid a
recession this year. This was reinforced by strong Chinese credit data,
the Chinese business cycle has tended to lead the European one of late.
Italian bonds have returned 2.4% year-to-date, Spanish bonds 3.6%,
Portuguese bonds 4.3% and Irish bonds 3.1%.
reduced volatility in the BTP - Bund spread and lack of willingness of
the EC to seek a confrontation with Italy into the European elections
seems to have enticed investors to set up fresh carry trades. However,
for the Italian bond market to find more lasting support, the
credibility of the government’s fiscal policy is still an important
hurdle to take. Indeed, the latest projections of the budget deficit for
the coming years and the government rhetoric on tax cuts and the
planned VAT hike clearly show there’s a large risk of fiscal slippage.
dovish ECB and the Brexit delay paved the way for Spain’s 10 year yield
to decline below one percent for the first time since 2016. Favourable
net supply dynamics this month also helped Spanish bonds. One would
forget that elections are due later this month.
market based measures of inflation expectations well below the ECB’s
inflation target, the ECB’s credibility seems at stake. At Thursday’s
ECB meeting president Draghi therefore kept the door to further policy
easing - beyond extending forward guidance – wide open. Draghi stressed
several times that “the governing Council stands ready to adjust all
instruments, as appropriate". The ECB is aiming to avoid a scenario
similar to 2011, when the ECB embarked on monetary tightening too soon.
Before resorting to some sort of tiered deposit system, the ECB will
likely first decide on the terms of the upcoming TLTRO3. They may not be
much less generous than the TLTRO2s after all.
Robeco Euro Government Bonds
the ECB meeting we trimmed back the Italy underweight, taking a more
neutral stance. We expected a relatively dovish outcome which, at least
for the short term, could provide support for the BTP-Bund spread.
Positions in the periphery and semi-core are concentrated in
longer-dated bonds. In this area spreads versus Germany look most
attractive. The fund’s investments in peripheral bonds are at circa 33%,
about 7% below the level of the index. Year to date the absolute return
of the fund is 2.7%.*