The European sovereign debt crisis is causing institutional investors in Europe to rethink their exposures to eurozone government debt.
Investors are dumping traditional government bond benchmarks and fleeing to German, French and Dutch bonds, corporate bonds and emerging market sovereign debt. Still others are simply reducing all eurozone exposure in their bond portfolios.
“The dominant effect of the recent sovereign debt crisis is it is becoming less and less clear what a safe asset is,” said Michael Korn, Frankfurt-based managing director and head of institutional business development in Germany at Allianz Global Investors. “The perception of what credit risk is has changed drastically, and allocations are being adjusted accordingly.”
Paul Kenny, Dublin-based senior investment consultant at Mercer LLC, said: “We are seeing a lot of concern from clients. ... Clients are talking about moving portfolios away from aggregate bond portfolios to those focused only on AAA-rated sovereign debt.”
This is a strategic move rather than one that most Irish pension funds will look to do in the short term, he said, as transaction costs and losses from selling distressed assets in favor of soaring ones would be too high a hurdle. “That's going to be a blocker,” Mr. Kenny said.
Officials at the 2.76 trillion Norwegian kroner ($422 billion) Government Pension Fund-Global, Oslo, are watching closely the 289 billion kroner the fund has invested in stocks — and 55 billion kroner in bonds — in Greece, Spain, Portugal and Italy, spokeswoman Siv Meisingseth told Pensions & Investments earlier this month. In 2009, the fund dumped some 77 billion kroner in government debt from those four countries.
Dutch pension funds typically hold Greek and Italian inflation-linked sovereign debt in their liability-hedging portfolios. Some are selling Italian debt in favor of inflation-linked swaps backed by non-euro bonds as a way to “prevent further exposure to southern Europe,” said Jelle Beenen, Amstelveen-based partner and head of investment consulting in the Benelux region for Mercer. They are hanging onto the Greek bonds because prices have sunk, and a sale would lock in those losses, Mr. Beenen said.
Dutch pension funds have been particularly hurt by the sovereign debt crisis as a byproduct of the European marketwide flight to quality, which drove down yields on Dutch government bonds, said Dennis van Ek, Amstelveen-based principal at Mercer. Lower bond yields increased liability values, which has hindered Dutch pension funds' progress out of deficit status, Mr. van Ek said.
Meanwhile, German investors want to dump government bonds issued by the so-called peripheral nations of Greece, Spain, Portugal, Italy and Ireland for fear of possible ratings downgrades and defaults, experts say.
The problem, however, is that bonds issued by these countries constitute about 40% of eurozone sovereign debt indexes; the loss of the five highest-yielding countries' debt leaves investors looking for returns and diversification elsewhere, experts say.