Robeco: Peripheral Europe Update

Main market events

After several weeks of tightening, peripheral spreads remained stable this week. In a speech ECB vice president Constancio mentioned that overall risks remained tilted to the downside, which helped to push German 10-year yields slightly lower at the end of the week. ECB president Draghi recognized the increasingly solid recovery, but made clear that underlying inflation pressures remain subdued. The comments from Draghi and Constancio make it less likely that the ECB will sound hawkish during the June 8th  ECB meeting. Italian bonds have returned -0.63% this year, Spanish bonds -0.13%, Portuguese bonds 5.7% and Irish bonds -0.33%. 

Italy 

According to local, media PD leader Renzi is working on a pact between PD and Berlusconi’s Forza Italia party to agree on a proportional electoral law. Chances for success are rather limited as  high-ranking PD officials are opposed to the idea. In case both parties agree on the electoral law, then chances for early elections will increase.

Spain

In a challenge for leadership of the PSOE (socialist party), former party leader Sánchez is re-appointed. Sánchez promised to rebuild the party. It is expected that with a new mandate, Sánchez will try to make his mark and therefore change the cooperative position of the party vis-à-vis  the running PP government. Risks for early elections have slightly increased, but these are not likely as the PSOE is lagging in the polls.

Greece

After 7 hours of negotiations the Eurogroup and Greek officials could not agree on debt relief measures. Before the IMF can participate in the bailout it requires credible debt relief measures. Germany on the other hand requires IMF participation, but is not willing to agree to debt relief. The next Eurogroup meeting is scheduled for  mid-June. An agreement is required no later than July otherwise Greece will have significant issues to pay maturing bonds. 

Robeco Euro Government Bonds

We maintained the overweight position in Italian bonds versus Spanish bonds this week. Italian fundamentals are clearly weaker than Spanish fundamentals, but this is already reflected in the current spreads. Italian government bonds have strongly underperformed Spanish bonds over the past year. Consensus positioning is underweight Italy. Many market participants fear imminent renewed political turmoil in Italy combined with the ECB withdrawing its support for bond markets. These fears are overblown and we expect Italian bonds to recover somewhat.We maintain our overweight position in Ireland. Irish bond spreads are attractive given the improved Irish fundamentals and its strong ESG scores. Currently the fund is 39% invested in peripheral bonds, in line with the index. Year-to-date the fund’s absolute return is -0.63%*.