Robeco: ECB holds QE cards against its chest

Main market events

Markets awaited eagerly this week’s ECB meeting where the ECB could potentially hint to upcoming QE adjustments to be announced in December. It was also the opportunity for Draghi to respond to the recent tapering rumors. Changes of German yields and peripheral spreads were limited this week. Italian bonds have returned 2.89% this year, Spanish bonds 6.23%, Portuguese bonds 0.84% and Irish bonds 4.89%.

ECB

At its December meeting, it is expected that de ECB will announce an extension and tweaks to the parameters of the QE program.  

Italy

The deficit target for 2017 was originally set at 1.8%, but Renzi decided to increase it to 2.3%. According to Reuters the EC will likely ask Italy for an adjustment of the budget. It was expected that Italy’s debt to GDP ratio would decrease, but with the latest deficit estimate for 2017, the ratio will increase further.  

Portugal

Today rating agency DBRS will publish its rating review on Portugal. Should DBRS decide to downgrade Portugal to non-investment grade, then the Portugal government debt can no longer be purchased for the ECB QE program. Also, the ECB will no longer accept Portuguese government bonds from the banking sector as collateral. The market expects the rating to remain unchanged as Portuguese spreads have decreased significantly the last two weeks.

Robeco Euro Government Bonds

We maintain our cautious stance towards euro periphery debt, despite the ECB’s QE program. The lack of further reforms and the failure to improve public finances sufficiently in the current benign environment make the periphery vulnerable to economic shocks, political risks or financial-market volatility. Consensus positioning is overweight in the periphery.

We have kept positioning in the periphery unchanged this week. The fund doesn’t hold any short-dated bonds of Italy due to the unattractive valuations. Currently the fund is 28% invested in peripheral bonds, versus 39% in the benchmark. Year-to-date the fund’s absolute return is 5.42%.

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