Robeco: Greek bonds plunge due to election fears

Peripheral markets struggled this week, as fears of early elections in Greece flared up. Bunds rallied in this environment, also due to the large drop in the oil price. Spreads on 10-year bonds from Spain and Italy rose by ca. 20 basis points. Spanish bonds have returned 15.1% year-to-date, Italian bonds 14.3% and Irish bonds 13.6%.

ECB

Banks took only EUR 130bn of 4-year loans at the second TLTRO. As banks also repaid EUR 40bn of old 3-year loans, the ECB’s balance sheet increases only by EUR 90bn, less than the market had expected. This increases the pressure on the ECB to buy government bonds as well.

Greece

Markets reacted negatively to the possibility of near-term elections as the Syriza party is currently heading the polls. This party wants to restructure the Greek government debt again. It also vows to undo several of the reforms and austerity measures implemented under the Troika program. Greek bonds plunged, with the yield on 3-year Greek bonds spiking to nearly 11%.

S&P

S&P downgraded Italy’s sovereign rating from BBB to BBB-, the lowest investment grade rating, but with a stable outlook. S&P at the same time upgraded Ireland by one notch from A- to A.

Robeco Euro Government Bonds

We remain positive on peripheral bond markets as fundamentals are improving and the ECB’s policy remains very supportive. Peripheral bonds remain attractive amidst the search for yield. We increased our overweight in Irish debt as Ireland has the best fundamentals of the peripheral countries. We maintained our overweight positions in Spanish and shorter-dated Portuguese bonds. We prefer Spain to Italy at similar spread levels based on better economic fundamentals. We reduced exposure to the periphery in November in anticipation of wider spreads, so we use the recent market movements as an opportunity to gradually add to our periphery exposure.

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