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Robeco: Portugal upgraded to Investment Grade

Update from the Robeco Global Fixed Income Macro team on the peripheral European sovereign markets: Portugal upgraded to Investment Grade. Pro-independence parties win Catalan elections.

Main market events

Peripheral bonds performed relatively well this week compared to German Bunds. Spreads tightened after the rating upgrade of Portugal by Fitch, late last Friday. Portugal is now rated Investment Grade by 2 of the 3 main rating agencies and hence will reenter indices widely used as benchmark. Portuguese bonds outperformed and Spanish bonds as well, despite the result of the Catalonian election. Ireland was upgraded by Fitch as well, to A+. Italian bonds have returned 1.43% this year, Spanish bonds 1.79%, Portuguese bonds 14.50% and Irish bonds 1.06%.


The pro-independence parties won the Catalan election this week, obtaining 70 of the 135 seats in the Catalan parliament, according to preliminary results. That said, they did not reach an absolute majority in votes (47.7% only). The left-wing Podemos obtained 8 seats, while the pro-Spain camp got 57 seats. A new separatist government is likely to be formed with the two main pro-independence parties (PDeCAT and ERC). To the extent that the third more radical separatist party (CUP) did not renounce to an unilateral declaration of independence, it is not clear whether it will be part of the new regional government. A new coalition including Podemos, that is in favor of a self-determination referendum, is possible as well. A key issue for the new government relates to the fact that 8 elected separatist members are either in prison or in exile. Without the vote of these deputies, they may well lose their slim majority. It is therefore likely that the separatist camp will first seek the release of their leaders. Meanwhile, they will also have to agree on a regional Premier candidate and a common stance on Catalonia’s independence. Given the political uncertainty that may prevail in the short-term, an upgrade by Fitch in January appears unlikely, but an upgrade to single-A by S&P in March remains possible.


This week, the latest Eurobarometer showed that Italy stands out as one of the major Eurozone countries with the lowest level of support for the euro (59%). This is in strong contrast with the Eurozone or the EU as a whole displaying the highest level of optimism since 2004 when the survey has been launched (74% - while countries such as Germany, Spain or Ireland recorded more than 80% support). This relatively moderate support for the euro will certainly have an influence on the result of the election early in March next year.

Robeco Euro Government Bonds

We have an overweight position in Spain and a small overweight in Portugal. We have an underweight position in Italy. We are positive on Spanish fundamentals, while we remain wary of the political risks in Italy. We hold 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 40% invested in peripheral bonds, in line with the index. Year-to-date the fund’s absolute return is 0.64%*.

* Robeco Euro Government Bonds, gross of fees, based on Net Asset Value, December 21, 2017. The value of your investments may fluctuate. Past results are no guarantee of future performance.

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