Robeco: Outperforming peripheral bonds

Main market events

 Peripheral bonds performed quite well this week despite the bond sell-off in US Treasuries and German Bunds. Neither the ongoing political uncertainties in Italy and Spain or the “hawkish” minutes of the December ECB meeting published yesterday have weighed on spreads. The ECB Governing Council showed a strong confidence in the inflation path converging toward the 2% target against a background of accelerating growth. It also mentioned the need to revise communication about QE and forward guidance as a result. Italian bonds have returned -0.07% year-to-date, Spanish bonds 0.07%, Portuguese bonds 0.36% and Irish bonds -0.41%.

Italy

Property prices continue to decline in Italy, unlike its peers in the Eurozone. Current prices are now 23% lower than their pre-crisis level. This will continue to weigh not only on banks’ corporate bad loans but also on households financial wealth. On the political front, the centre-right parties last Sunday agreed to form a coalition ahead of the elections on 4 March. They reached a broad agreement about a flat tax rate and a revision of the pension reforms. If implemented, the 15% to 20% flat rate would have negative consequences on the debt sustainability of the country in the medium term. The debt to GDP ratio (132%) remains one of the highest in the Eurozone. As the centre-right bloc continues to gain momentum in polls, their drastic economic plans could negatively impact Italian spreads in the coming months.

Spain

The government revised upward its 2018 growth forecast from 2.3% to a level “clearly above 2.5%”. This has been supported by strong PMIs and industrial production continuing to surprise on the upside – 4.2% in November against 3.4% in Q3 2017. The economic activity has not been impacted by the uncertainties surrounding the Catalan situation. That said, more stress may be expected especially if Puigdemont is elected as the Catalan Premier on 31 January. On Tuesday, he received a provisional backing of the two other pro-independence parties. But the parliament rule imposes that the new Catalan leader has to present the government programme “in front of the house”. With Puigdemont being in Brussels, a legal issue is currently debated whether a remote presence via a TV screen could be acceptable or a physical presence is required. Independently of the legal issues, Madrid is likely to oppose his candidacy.

Robeco Euro Government Bonds 

We have an overweight position in Spanish government bonds and a small underweight position in Italian bonds. We are positive on Spanish fundamentals, while we remain wary of the political risks in Italy. We hold no Irish bonds as their spreads over France do not compensate for the potential risks stemming from Brexit, international tax reform and the volatility inherent to Ireland’s size. Currently the fund is 40% invested in peripheral bonds, in line with the index. Year-to-date the fund’s absolute return is -0.31%.

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