European institutional investors ditch govt bonds for corporate debt

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In the face of interest rate risk European institutional investors are looking to replace their sovereign debt assets with corporate bonds, according to an Allianz Global Investors survey.

Of the 155 institutional investors questioned, 69% revealed company debt would be the primary substitute for government bonds, previously considered the investment with the steadiest risk-return ratio.

The second most popular option was emerging market bonds which was chosen by 37% of investors. Just under 10% said they would rather opt for developed market equity whilst 10.5% said they would buy emerging market stocks.

The institutional investors surveyed collectively oversee nearly €2 trillion assets under management. 

Commenting on the survey's findings, the CEO of Allianz GI James Dilworth said that financial repression is increasingly forcing investors to diversify away from traditionally held assets.

‘Investors are quite constructive when it comes to watching out for substitutes for sovereign debt and readying their organizations for a broader variety of risks,’ Dilworth said during a conference in London on Wednesday.

‘Investors who only focus on avoiding risks instead of deliberately taking specific risks will find financial repression a trip of no return.’

Referring to the radically opposing views towards bond and equity risks of veteran investors Warren Buffet and Bill Gross, Dilworth said that such conflicting views in the market is the main driver of volatility rather than risks of waning economic fundamentals.

‘It’s the different views in the market that are causing uncertainty today. We are no longer talking about risk – risk is quantifiable. It’s about the uncertainty in the market,’ he said.

In the fifth year into the financial crisis, the euro sovereign crisis is still deemed as the main risk by 13% of investors. This has dropped from 35% who said this was their main risk in the annual survey released twelve months ago.