Robeco: Periphery bonds down somewhat on market turbulence

Marktrückblick

Periphery bond markets initially found some stability amidst wider market turbulence as the Italian government continues to express a more conciliatory tone towards Brussels.

10.12.2018 | 12:30 Uhr

Main market events

Periphery bond markets initially found some stability amidst wider market turbulence as the Italian government continues to express a more conciliatory tone towards Brussels. Also redemption flows supported the Italian debt market. However later in the week continued worries about China-US trade relations were detrimental for sentiment. In this environment German Bunds inched higher whilst peripheral spreads widened.

Italy

Italian news flow continued to suggest the Italian government is willing to find a solution in its stalemate negotiations with the EC. At the beginning of next week Italy will forward an updated budget proposal to the EC. Its expected this proposal will indicate a reduced deficit target. Whilst probably still above levels the EC would see as satisfactory, the EC is likely to see a deficit reduction as a significant step in the right direction.

Spain

The socialist PSOE party was defeated in local elections in Andalusia, losing 14 of its 47 seats. Big winner was the far-right VOX party. This electoral shift reduces chances of a snap election in early 2019. The budget for 2019 needs to be approved in January and PM Sanchez has hinted upon calling early elections if the budget would be rejected.

ECB

All eyes are now on the ECB governing council meeting next Thursday the 13th. The staff will publish 2021 forecasts for the first time. Growth forecasts will likely be revised down slightly. It is expected the ECB will remain confident in its ability to reach its inflation mandate amidst economic turmoil and weaker oil. Therefore it is still very likely the ECB will end its net asset purchases. ECB sources however mention that an indefinite TLTRO could be announced. Such a facility could be indefinite, but aimed at private sector lending only.

Robeco Euro Government Bonds

As the backdrop for Italian bonds seems to be stabilizing and valuations are still elevated, we slightly added to Italy positions in 5 year and 10 year bonds. We see this strategy as tactical in the run up to a possibly dovish ECB meeting and continued constructive progress in Italy - EC negotiations. We also remain overweight Spain and Ireland, versus an underweight in Portugal. In semi core we remain overweight Belgium versus an underweight position in France. Investments in peripheral bonds rose slightly to 43% which is about 3% above the index level as expressed in market value. Year-to-date the fund’s absolute return is -0.24*.

* Robeco Euro Government Bonds, gross of fees, based on Net Asset Value, 7 December, 2018. The value of your investments may fluctuate. Past results are no guarantee of future performance.


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