Robeco: German agreement supports peripheral bonds
Main market events
Periphery government bonds managed to keep track of German bonds, despite the weakness in risky assets. The German coalition agreement led to spread tightening for all countries on Wednesday. Portuguese and Greek spreads widened, but Spanish spreads were unchanged over the week and Italian and Irish spreads even tightened slightly. Italian bonds have returned 0.6% year-to-date, Spanish bonds 1.07%, Portuguese bonds 0.15% and Irish bonds -0.81%.
The CDU/CSU and the SPD have finally reached a coalition agreement. With the former president of the EU parliament Schulz as foreign affairs minister and an SPD finance minister as well, this coalition is considered strongly pro-European. The agreement mentions bigger German financial contributions to EU programs to fight youth unemployment in Southern countries and plans for a European Monetary Fund. Together with Macron’s government in France a renewed push towards further integration and strengthening of European institutions is expected.
Greece managed to issue EUR 3bn of a new 7-year bond, although the issuance had to be delayed by two days due to the market turmoil. This likely aims to demonstrate Greece’s access to market funding, which should make it possible for Greece to end a series of bailout programs in August. Currently Greece has a primary surplus. i.e. government revenues exceed spending, apart from the interest payments on government debt. Further debt relief (lengthening of maturities and grace periods where Greece does not need to pay interest on its bailout loans) should help to make Greek debt more sustainable and limit its funding needs in coming years.
Spain gained approval from the ESM for further early repayments totaling EUR 5bn. After these payments, Spain will have repaid already a third of the EUR 41bn loan the ESM granted in 2012 for the recapitalization of Spanish banks. The first payment was only scheduled for 2022.
Robeco Euro Government Bonds
We have reduced our already small underweight position in Italian bonds further, given the more supportive environment with strong economic growth and a renewed push for further European integration. We have also reduced the overweight position in Spanish government bonds a bit. Spanish bonds have clearly outperformed Italian bonds recently. The relatively high difference in spread between the countries now better reflects the stronger Spanish credit fundamentals as well as risks related to the upcoming Italian elections. The fund still holds no Irish bonds as their spreads over France do not compensate for the potential risks stemming from Brexit, international tax reform and the volatility inherent to Ireland’s size. Currently the fund is 43% invested in peripheral bonds, a bit above index level. Year-to-date the fund’s absolute return is -0.38%*.
* Robeco Euro Government Bonds, gross of fees, based on Net Asset Value, 2 February, 2018. The value of your investments may fluctuate. Past results are no guarantee of future performance.