Main market events
Draghi’s dovish comments in Sintra took center stage this week. As also
the Fed hinted at a change in policy towards accommodation, global
bonds rallied. The grab for yield was fueled as Bund yields dived deeper
into negative territory, touching -0.30%. Italian bonds have returned
5.1% year-to-date, Spanish bonds 8.6%, Portuguese bonds 8.2% and Irish
BTP-Bund spread declined to touch 232bp, a fresh year-to-date low, as
investors grew less worried about the cost of Italy’s public debt in the
face of a prolonged and potentially even more accommodative ECB policy
backdrop. However, the spread bounced back a bit towards the end of the
week. Investors realized Italy still faces political risks with deputy
PM Salvini reportedly threatening to call for early elections if taxes
are not cut next year. Also economic risks remain, with GDP growth
possibly turning negative again in Q2.
Fitch will review Spain’s A- rating. Fitch could upgrade the outlook
from stable to positive, possibly preluding an upgrade to A later this
year. The market impact of such a change would likely be minimal, given
Spain’s already strong relative performance in the past weeks.
President Draghi in his Sintra speech on Tuesday lived up to his
reputation and managed to exceed market expectations once more. The bar
for further policy action was laid low. All tools clearly are on the
table, including rate cuts and a restart of QE. Regarding the latter Mr.
Draghi added to the dovish sentiment by stressing that the asset
purchase programme still has “considerable headroom” and thus suggesting
the ECB is not constrained by the 33% issuer limit for government bond
purchases. He also emphasized that the inflation target is symmetric, so
an overshoot of inflation above 2% can be allowed. It is therefore
likely easing measures are announced either at the July or September
meeting. It seems Mr. Draghi is firmly ensuring monetary policy remains
accommodative even after he leaves in October, leaving little headway
for his successor to reverse course without a strong market reaction.
Robeco Euro Government Bonds
fund benefited significantly from the rally in peripheral and semi-core
markets. At the start of the week the fund added to semi-core exposure,
further increasing its offensive stance. As mentioned last week, we
anticipated a very dovish speech from President Draghi. Investments in
peripheral bonds remained at 35% which is 5% below the level of the
index, but this is mainly because of expensive valuations in very short
dated peripheral bonds. Year to date the absolute return of the fund is
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