Robeco: ECB cuts rates to negative

Peripheral bond markets had a tremendous year in 2014, with Spanish bonds returning 16.9%, Italian bonds 15.7% and Irish bonds 13.9%. Only Greek bonds posted negative returns of -0.9%. Increased stimulus from the ECB and the resulting “search for yield” boosted peripheral bond returns. The improving fundamentals also enticed foreign investors to return to these markets.

European Central Bank

Buying government bonds is widely expected to be the next step.

Ireland

Ireland was the first country to exit its bailout program. It regained its investment grade rating from Moody’s, GDP growth accelerated to more than 7% in Q2, the budget deficit fell below 4% and the bad bank NAMA has worked off more than half of its assets, 2 years ahead of schedule.

Spain

The Spanish economy gained traction: it grew at a 2% annualized pace in the recent quarters, driven by domestic demand. Political risks increased in Spain, with Catalonia trying to organize a referendum on independence. The Treasury launched a 50-year bond.

Italy

Renzi replaced Letta as prime minister, pushing for more and quicker reforms. Reforms to prevent political gridlock and labor market reforms are currently in the parliamentary approval process. Italy is still struggling with slightly negative GDP growth.

Greece

Greece issued some bonds in the market early in 2014, but yields rose strongly again towards the end of the year as the government fell. Elections will be held this month. The anti-austerity Syriza party is currently leading the polls. Current funding is only sufficient for the first few months.

Robeco Euro Government Bonds

We have been overweight peripheral bond markets throughout the year. In the first part of the year we gradually shifted our positioning from short-dated to somewhat longer bonds to stay ahead of the flattening of the spread curves. In the second half we benefited several times from temporary spread widening by adding to our periphery exposure tactically. Year-to-date the fund’s absolute performance is 13.89%*, helped by the strong performance of periphery bonds.

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