Robeco: Attacke auf Italien

Main market events

Peripheral spreads have widened significantly this week, notably in Italy but also in Greece despite its rating upgrade. The tensions between the US and Turkey contributed to a sharp deterioration of market sentiment. Italian bonds have returned -5.5% year-to-date, Spanish bonds 2.2%, Portuguese bonds 1.8% and Irish bonds 0.8%.

Italy

Giancarlo Giorgetti, number two of Lega but also president of the Budget Committed in the Lower House for about ten years, said last weekend that a speculative attack on Italian bonds was possible before the end of the month. Two main arguments were mentioned. The first is the thin trading liquidity in the summer, an propitious environment where hedge funds usually go after weak links. The second one referred to the opposition of the European establishment to the new populist government, fueled by the fear that populism if successful in Italy could spread to other Eurozone countries. Such a statement coming from a moderate used to operate in the backstage rather than in the spotlight is striking. His intervention shows that the government is well aware of the risk of a speculative attack on Italy, if the 2019 Budget proposal were not to respect the EU rules. That said, this risk was denied by Di Maio on Monday. Given the expected slowing economic activity in Italy and the rising cost of funding, a meaningful slippage of the budget is likely to trigger a further widening of BTP spreads.

Greece

This week Fitch upgraded Greece by two notches to BB- with a stable outlook. The decision was partly driven by the substantial debt relief agreed by the Eurogroup, but also by the track record of primary surpluses and the lower political risk. This rating decision is positive news ahead of Greece returning to market funding. But similar to what has been seen in Italy and Spain, spreads widened. On the negative, the ECB revocation of the waivers on the eligibility of Greek bonds as collateral for refinancing operations, will increase the cost of funding of local banks. They will have to go back to the interbank market or to the expensive ELA (Emergency Liquidity Assistance).

Robeco Euro Government Bonds

We reduced our small overweight position in Italian and Spanish bonds this week given the lack of visibility regarding the 2019 Italian budget and the less supportive market sentiment triggered by the financial turmoil in Turkey. Overall we have repositioned our portfolio to be able to better cope with potential further deteriorating market conditions. Currently the fund is 34% invested in peripheral bonds, less than the index level as expressed in market value. Year-to-date the fund’s absolute return is -0.37%*.

* Robeco Euro Government Bonds, gross of fees, based on Net Asset Value, 16 August, 2018. The value of your investments may fluctuate. Past results are no guarantee of future performance.