Financial sector bonds offer relative value over government bonds, Raiffeisen says

Over the last months of 2012, there was a vigorous recovery in government bonds from peripheral countries, along with bank bonds, according to Austria’s Raiffeisen Capital Management.

In its latest report on the asset class, the asset manager said this move does nothing whatsoever to address the grave imbalances within the Eurozone and the problem of excessive public debt levels and that sespite the easing of tensions on the market, the crisis is far from over.

“In 2013, there will also probably be plenty of political developments, for example one need merely think of the upcoming general elections in Italy and Germany,” Raiffeisen said.

In terms of economic performance, for the eurozone as a whole 2013 will probably be another year of recession, or zero growth at best even if less severe than 2012, especially in the peripheral countries.

“The strict austerity policies are reaching the limits of their political viability and so far there is little to show for it. Public debt levels have not fallen in spite of the public saving measures. On the contrary, they have continued to rise(with Greece as the only exception in this regard, but the improvement there stems solely from the debt hair-cut and various debt restructuring measures. Accordingly, it is possible that the strict approach of austerity will be gradually eased up in the quarters ahead, temporarily at least,” Raiffeisen said.

Euro corporate bonds put in an excellent year, and the big winners were mainly financials and high yield instruments. IG corporate bonds still offer a better risk/return profile than EUR government bonds, whereby bonds from non-peripheral countries are still preferred with an eye to risk considerations, the firm said.

While the attractiveness of financial sector bonds has decreased in recent months due to the strong price increases, relative to government bonds these instruments still offer an interesting risk-return profile.

Nevertheless, careful selection of issuers is becoming more and more important, and bonds from credit institutions in the core European countries should be preferred.

“For bond investors, 2013 appears certain to be a year with much lower absolute returns than in 2012, in particular as – due to the extremely low yield levels – any interest remunerated may be more than offset by small increases in yields,” Raiffeisen said.

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