European institutional investors are less worried about the creditworthiness of sovereign debt issuers, as 35% deemed sovereign debt risk a substantial risk to their financial targets a year ago, compared to just over 13% today, according to Allianz Global Investors’ latest RiskMonitor survey.

Of the 155 respondents, less than 9% sees overall market volatility as a large risk, compared to 27% last year, while the percentage of respondents deeming tail risks as a large risk has remained stable at around 15%.

More than 20% view current interest rate levels as a large risk, especially in France, Italy and the German speaking countries. A third of European respondents named current or falling interest rates as the biggest single risk to their financial targets over the next year.

According to Allianz Global Investors Europe CEO James Dilworth, regulation of capital markets and investors will become more important not only to improve the stability of the global financial system, but also to help governments to cope with their debt. He said: “In this context, it doesn’t come as a surprise that projected regulation on capital requirements favours investments in sovereign bonds. They massively affect asset allocations of institutional investors and pension funds in a pro-cyclical way; this is a further facet of financial repression.”

With regards to substitutes to government bonds, 68.8% of respondents look at corporate debt, followed by emerging markets debt (37%) and real estate (31.2%). Less popular answers were covered bonds (22.7%), infrastructure debt (13.6%), equity (13%), private equity (10.4%), emerging markets equities (10.4%), developed markets equities (9.7%) and commodities (5.8%).

Dilworth added: “It is becoming clearer that Western economies are prepared to inflate their way out of debt thus trying to avoid any systemic shock. But the sovereign debt crisis is far from being over. It is good to see that investors are quite constructive when it comes to watching out for substitutes to sovereign debt and readying their organisations for a broader variety of risks. On the other hand, investors who only focus on avoiding risks instead of deliberately taking specific risks will find financial repression a trip of no return.”

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