Robeco: Italy stole the show in primary markets

Main market events

Risk markets were fueled by developments around Brexit and a more constructive tone in US-China trade talks. The Italy- Germany bond spreads rallied, shaking off supply pressures and growth concerns. On Friday the spread traded at 250bps, back to levels seen at the end of December. Italian 2 year bond yields declined to below 0.30% a level not seen since the May 2018 market rout. Also debt issuance in the Eurozone continued to impress.

Italy

Italy stole the show in primary markets and issued EUR 10 billion in a 15 year syndicated benchmark. Books amounted to almost EUR 36 billion, a record. A quite generous new issue premium did help to attract demand, but the secondary market held up nicely during the book building process and launch. The issuance underscored returning investor demand for the country. So far supply concerns around European governments seem to have been unfounded.

S&P released new forecasts for Italian GDP growth this week. Their estimates of 0.7% for 2019 and 0.9% for 2020 are modestly below the Italian government’s projections (1.0% for 2019).

Spain

The Spanish cabinet presented their 2019 budget to parliament. The government aims to reduce the deficit by 1.4pp to 1.3% this year. The parliament still has to approve this budget, which is likely to be a difficult process.

ECB

ECB’s Draghi in a recent speech noted that the Eurozone is in a slowdown and not a recession, but acknowledged that the European economy is on a weaker footing so there is no room for complacency. We do not expect policy changes to be announced at the coming Governing council meeting on Thursday. However President Draghi can indicate another round of cheap bank financing, in the form of TLTRO’s, is around the corner.

Robeco Euro Government Bonds

We participated in the new Italian 15 year syndicate. New issue premium was attractive and we used this opportunity to switch from existing paper into the new one. Overall however the exposure to Italy and periphery in general remained unchanged. We are still slightly constructive focusing on longer dated bonds. Regarding France we remain more skeptical also as unrest around the yellow vests protesters continues to rumble and remain a significant underweight position.

The fund’s investments in peripheral bonds amounts to 37% which is below the index level as expressed in market value. Year to date the absolute return of the fund is 0.33%.

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