Robeco: Peripheral European Update

Schottland

Both FOMC and ECB minutes signaled a dovish bias indicating rates will not rise (further) and central bank policy will continue to be accommodative. The grab for yield therefore is offsetting mounting trade and geo-political concerns.

29.05.2019 | 12:48 Uhr

Italian bonds have returned 1.65% year-to-date, Spanish bonds 4.7%, Portuguese bonds 5.06% and Irish bonds 3.3%.

Italy

BTPs defied the geo-political turbulence and rallied sharply. Comments from Salvini indicating that EU rules should be changed and not broken, added to the enthusiasm. It’s highly unlikely however that the fiscally conservative Eurozone countries would be equally enthusiast about changing the Eurozone budget deficit rules. Moreover, on June 5, the EC will publish it so-called Spring Package, which possibly could contain some first steps towards opening an Excessive Deficit Procedure for Italy. This could fuel tensions between the EC and the Italian government. 

Spain

The 10y SPGB-Bund spread declined the past weeks and reached the year-to-date low at 95bp. SPGBs were supported by the relatively benign outcome of the general elections and relatively strong Spanish growth. As European PMI’s indicate the manufacturing sector remains in contraction and the periphery growth trend is weakening, we are cautious about the prospects of further SPGB outperformance from here. Also as we are awaiting more clarity around PM Sanchez’s ability to form a stable government. 

Ireland

The 10y Irish-Bund spread was subject to the breakdown of UK cross party Brexit negotiations. Irish bonds underperformed and could be prone to further volatility over the next weeks. Discussion around a hard Brexit is likely to gain traction, especially now it is likely that a Brexiteer will be the successor of UK PM May who announced her resignation.

ECB

The minutes of the April ECB Governing Council meeting had a dovish tone as “inflation remained uncomfortably below the Governing Council’s inflation aim and market-based inflation expectations had receded”. As the minutes are in fact old news and economic headwinds in Europe have increased since April, the upcoming June 6th governing council meeting could have room to surprise with favourable terms for the cheap bank lending tool, the TLTRO3. 

Robeco Euro Government Bonds 

Risks around upcoming events remain. We continue to have a cautious bias in the portfolio. Investments in peripheral bonds remained at 28%, about 12% below the level of the index. 
Year to date the absolute return of the fund is 2.89%*.

* Robeco Euro Government Bonds, gross of fees, based on Net Asset Value, 24th May, 2019. The value of your investments may fluctuate. Past results are no guarantee of future performance.

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