High yield now less risky than government bonds, says top manager

European sovereign debt is facing tough times but this is good news for top high yield manager Alexandre Caminade of Allianz Investors as country downgrades mean previously out-of-reach high quality companies are now within his grasp.

A game of snakes and ladders is probably the best way to describe the current situation in high yield: As one corporate enters the sector, another one moves up the ladder.

Such fluidity is attractive to Euro Stars A-rated manager Caminade.

‘You really have to take it case by case but more sectors are entering high yield territory and this means more diversification,’ says Caminade, who runs the Allianz Euro High Yield Bond fund.

‘With the downgrade of Portugal into high yield, you have areas like Portuguese telecoms that are now in the sector. This whole phenomenon started a few quarters ago and this dynamic will continue if we see more sovereign downgrades.’

Italian energy company Edison is one of the other newcomers, says Caminade, following Italy’s downgrade. Even if the country were to suffer a further rating cut he does not believe it would have a great impact on its pricing power as it is still a company with good fundamentals.

‘There are a lot of very interesting companies out there. Large corporates that offer more security than many of the smaller ones we see.’

Another example which he says supports this view is French cement company Lafarge. It is a large secure group which he described as being typical of some of the opportunities entering his sector.

‘You have to look at the sectors that are most linked to sovereign debt. The countries that are most at risk in my eyes are Spain and Italy.’

‘Italy is BBB so we could potentially have its utilities and telecoms industries that fall in to high yield.’

‘Not long ago we said that government bonds, covered bonds carried no risk,' he said highlighting the fact that few investors went into the degree of detail required for analysing corporates.’

‘The high yield sector is now less risky than government bonds in relative terms. It has been carried away in the same tsunami.’