Robeco: Spanish prime minister Sanchez calls snap elections

Main market events

Peripheral bond markets showed a mixed picture during the week. Especially Italian bond yields zigzagged as noisiness around Italian politics continue. Italian bonds have returned -0.2 year-to-date, Spanish bonds 1.2%, Portuguese bonds 1.7% and Irish bonds 1.1%.

Italy

Italian bonds continued their roller coaster ride this week. Bonds initially rallied sharply in the first half of the week but again sentiment didn’t endure. On Monday it seemed that investors found some support by a report from the bank of Italy that gross NPLs declined to their lowest level since 2011. Furthermore the right wing Lega party made large gains in a regional election in Abruzzo over the weekend, winning a large share of the vote. The Lega party is generally regarded as being more fiscally prudent than its 5star coalition partners. However on Friday, press agency Reuters quoted the senior Italian Lega lawmaker Borghi as saying ‘the European elections are the last chance to change Europe, otherwise Italy has to leave’. 

Spain

Spanish prime minister Sanchez called for snap elections on Friday as his minority government failed to pass the proposed 2019 budget. Elections are now scheduled for April 28th, 2019. Although the risk that the 2019 fiscal outlook will deteriorate has increased, the market seems to attach a low probably that the outcome of these elections will materially impact Spain’s political and fiscal course. We anticipate that some uncertainty could linger and spread volatility can rise given increased political and fiscal risks.

ECB

ECB official Benoit Coeure struck a dovish tone on Friday by saying that the economic slowdown was clearly ‘stronger and broader’ than expected and that the inflation path would therefore be shallower. He said that a new TLTRO was possible and was being discussed. Markets clearly reacted positively on these announcements.

Robeco Euro Government Bonds 

We further reduced some of the peripheral exposure in the fund. We switched 30-year Spain into France as Spanish bonds have performed relatively well this year, while France has lagged. We also reduced the overweight in Ireland as an adverse Brexit outcome can impact Irish bonds asymmetrically. We also used the rally in the first half of the week to slightly increase the underweight in Italy. The fund’s investments in peripheral bonds amount to circa 34%, about 6% below the level of the index. Year to date the absolute return of the fund is 0.89%*

_{* Robeco Euro Government Bonds, gross of fees, based on Net Asset Value, 15}^th _{February, 2019. The value of your investments may fluctuate. Past results are no guarantee of future performance.}

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