Robeco: Positive week for peripheral bond markets

Main market events

One of the catalysts for the risk-on sentiment were signals from Japanese authorities that more fiscal and monetary stimulus is forthcoming and this drove global risk markets to positive areas. Italian bonds have returned 3.74% this year, Portuguese bonds -1.48%, Spanish bonds 5.27% and Irish bonds 4.81%.

Spain

As a response on the potential fine from the EU for missing agreed fiscal targets, Spain responded by signaling to introduce extra austerity measures totaling 0.7% of GDP. Given the lack of support to reappointment Rajoy as Prime Minister, changes that Spain will have a new government soon are limited. Without a government the above mentioned fiscal austerity measures can’t be implemented. 

Italy

With only two weeks left (July 29) for the publication of the banking stress tests, there is still no progress for the recapitalization of Italian banks. On that note Dijselbloem repeated his stance that the EU bail-in rules are clear and that these rules should be adhered to. In contrast, France is more willing to provide support since minister of Finance Sapin mentioned that the EU should be flexible and voice solidarity. 

Ireland

A revision of Ireland’s 2015 GDP growth showed a very high growth rate of 26.3% compared to the previous estimate of 7.8%. The outsized growth number can largely be explained by corporate restructurings, where the head office of a company is moved to Ireland. These corporate changes have a significant statistical impact, but limited impact on the real economy. The Irish central bank responded in this regard, that the high growth number does not accurately reflect the Irish economy.

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 makes the periphery vulnerable. The Brexit will have ramifications for the peripheral countries, since it will result in further uncertainty and lower economic growth. Consensus positioning is overweight in the periphery and valuation is not really compelling. Changes in the ECB’s buying program could change our stance.

We don’t hold any short dated bonds of Italy and Spain due to unattractive valuations. The  holdings of peripheral bonds are unchanged at 24%, versus 39% in the benchmark. Year-to-date the fund’s absolute return is 5.92%*.

* Robeco Euro Government Bonds, gross of fees, based on Net Asset Value, YTD July 14, 2016.The value of your investments may fluctuate. Past results are no guarantee of future performance.