Robeco: Portugal risks a clash with European Commission

Main market events

The market sentiment was more or less neutral, still peripheral bond spreads increased further. Issuances of new long-term bonds did put pressure on peripheral spreads. Italian bonds have returned 1.00% this year, Portuguese bonds -2.49%, Spanish bonds 1.92% and Irish bonds 2.12%.

Portugal

During the first quarter of 2016 the unemployment rate increased to 12.4% from 12.2% in the last quarter of 2015. Also the economic growth disappointed during the first quarter (0.1%), where a growth of 0.4% was expected. The weaker data shows the downside risk of the forecasted economic growth of 1.8% by the government. At the end of May the European Commission will decide if Portugal will be fined for their excessive deficit. A recent statement from the Left Bloc, to reject increases of the VAT and income tax, show the fragility of the minority government.

Greece

During the first quarter of 2016 the unemployment rate increased to 12.4% from 12.2% in the last quarter of 2015. Also the economic growth disappointed during the first quarter (0.1%), where a growth of 0.4% was expected. The weaker data shows the downside risk of the forecasted economic growth of 1.8% by the government. At the end of May the European Commission will decide if Portugal will be fined for their excessive deficit. A recent statement from the Left Bloc, to reject increases of the VAT and income tax, show the fragility of the minority government.

Spain

The most recent polls show that the combination of Podemos and United Left is indeed advancing in the number of votes. The combination is currently second largest in number of votes. The combination Podemos/UL would get 24.7% of votes, compared to 22.1% in April. The Spanish Treasury issued this week a 50 year bond at a yield 3.45%. The deal statistics show that there was significant demand for the bond.

Robeco Euro Government Bonds

We continue to see the ECB’s QE program as supportive for peripheral debt, but political risks are rising in the peripheral countries and growth is no longer improving. As consensus positioning is overweight in the periphery we have become more cautious with respect to the periphery. 
We continue to have an underweight position in both Spain and Italy given the evolving political risks and since the current spread level makes the periphery vulnerable. We don’t hold any short dated bonds of Italy and Spain due to unattractive valuations. We have an underweight position in 10 year Italy and Spain. Peripheral bonds make up 16% of the fund. Year-to-date the fund’s absolute return is 2.98%. 

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