Robeco: ECB steps up bond purchases from the start of April

Main market events

Peripheral bonds reversed last week’s widening, and outperformed core and semi-core bonds.Italian bonds have returned 2.6% this year, Portuguese bonds -1.3%, Spanish bonds 2.7% andIrish bonds 2.6%.

Spain

This week Spain surprised the market by publishing a larger than expected budget deficit. For2015 the deficit was 5.2% compared to a European Commission target of 4.2%. The larger deficitcan primarily explained by the larger deficits of regional governments and more than expectedoutlays for social security. For 2016 the deficit target is 2.8% which seems to be a daunting taskgiven the struggles to form a government. The market response was surprisingly muted.

ECB

The Eurosystem will step up monthly purchases of government bonds from the start of April. Thetotal volume will increase from EUR 60 bln to EUR 80 bln per month.

Portugal

Portugal’s Public Finance Council published a note were it called for further austerity measures.The government has reversed austerity measures and uses rosy growth projections. In thisregard, Fitch makes note of elevated political risks since the minority government can’t findenough support for additional measures.

Ireland

The Irish Treasury issued for the first time a bond with a maturity of 100 years at a yield of 2,35%.The bond was constructed at the request of a small number of investors, which explains thesmall issue size of EUR 100 mln.

Robeco Euro Government Bonds

We continue to see the ECB’s QE program as supportive for peripheral debt, but considering thatpolitical risks in the peripheral countries are rising and that growth is no longer improving wehave become somewhat more cautious with respect to the periphery.

We took profit on our long Ireland bonds. Another consideration to reduce the Ireland exposure,is that the current yield levels do not compensate for the additional risks for Ireland in the eventof a Brexit. We don’t hold any short dated bonds of Italy and Spain due to unattractive valuationsand we have a small underweight postion in 10 year Italy. Peripheral bonds make up 21% of thefund. Year-to-date the fund’s absolute return is 3.52%.

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