Raiffeisen sees value in short-term European periphery debt

There is no end in sight for the troubles in Italy, Spain and Greece as the debt crisis in Europe escalates, yet Austria’s largest investment manager favours periphery government bonds over the meagre returns of Germany’s debt.

Raiffeisen Capital Management is not hopeful for an easy solution to the debt crisis in Europe. Robert Senz, CIO for global bonds, said: “The current situation results in a significant chance of an accident. Even the smallest deviations from the pre-defined requirements can jeopardise the entire system.”

The greatest negative impact, of course, will be felt by the peripheral states. Senz said: “The distress in the Spanish banking sector and the bankrupt provinces is weighing on the market, along with the endless discussions about Greece. This, in turn, is exacerbating the situation for Italy and Spain on the bond markets.”

Yet he still thinks short-dated government bonds in some peripheral states are a good investment option. He points to three-year Italian and Spanish bonds, which are yielding 3.65% and 4.4% respectively.

In comparison, he sees German government bonds as a “hardly attractive” investment option. The yields on its three-year government debt are currently negative, while even 10-year bonds are yielding barely over 1%.

However, investing in Europe’s peripheral debt requires a certain degree of risk tolerance, which not all investors may have.

For more risk averse allocators, corporate bonds remain an option. Since the onset of the debt crisis, many advisors have been directing investors to corporate bonds, considering them a safer option with superior returns.

But while the risk-return profile on these bonds is still attractive compared to Germany’s debt, yields on investment grade corporate bonds are relatively low. Raiffeisen also warns that careful selection of names in the corporate space is becoming increasingly important.

Inflation-linked bonds are a better option for allocators unwilling to take risks, says Raiffeisen. These bonds do not have a fixed coupon payment and redemption. Rather, these parameters fluctuate with the rate of inflation. Thus, the bonds work as an inflation hedge as well as offering capital preservation.

They could be a good option for investors worried about price increases in the Eurozone, Raiffeisen comments. Yet inflation in Europe has remained relatively stable over the past three months, so it may not necessarily be the top concern.

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