EUROPE - European pension funds dismissed concerns about Germany's failure to reach its maximum sales target in a bonds auction last week, but remain cautious about investing in German Bunds due to their low risk premium.    

In interviews with IPE, several pension funds have analysed the reasons why Germany missed its €6bn target in the 10-year government bond auction on Wednesday last week.

According to Anders Hjælmsø Svennesen, investments director at the Danish pension fund ATP, the level of interest rate at an absolute level on German bonds remains very low.
"If you are a pension fund targeting a return on investment of for example 5%", he said, "investing in German government bonds that return 2% is not that attractive."
Nonetheless, Hjælmsø Svennesen conceded that the German issuance still retained high liquidity and said ATP was still seeking exposure to the country's debt as part of its plan to acquire interest rate exposure.
"We invest in safe bonds that, we believe, reflect the changes in interest rates level due to macro-economic effects with no credit spread.
"In addition, the fact that German bonds have a high liquidity, makes these instruments very attractive to protect our portfolio against interest rate risk."

With some of ATP's European counterparts looking to invest in more risky government bonds issued by Spain, Italy or France, Hjælmsø Svennesen said that the DKK500bn (€67bn) fund was currently considering all its options.
However, bonds by the above countries came under a different investment category due to their implied credit spread, according to Hjælmsø Svennesen.
He said: "If we were considering buying Spain, Greece or Italy, it would be part of our credit exposure as our risk strategy for credit investments differs from the risk strategy we apply for interest rate investments."

The French €11bn public pension fund for civil servants, ERAFP, also pointed out the fact that German 10-year bonds currently offer a low return on investment compare to the average returns the scheme expects from such investments.

"Considering that the peripheral countries of Europe have a high probability of defaulting and given the strong dependence of the German economy on other European countries, we believe that Germany is likely to be affected", ERAFP told IPE.

"Even though Germany remains one of the strongest countries in the EU, we cannot believe that the country will be spared by a potential implosion of the euro-zone."

The pension fund said that 10-year French government bonds were more attractive than their German counterparts.

ERAFP said it remained confident about France's outlook, arguing that the country had the ability to meet its commitments and repay its debt.

"Additionally, since our pension fund represents civil servants, investing in French sovereign debt is therefore legitimate," ERAFP added. 

However, contrary to some other pension funds in Europe, the scheme remains cautious about other debt instruments issued by peripheral countries and maintains its risk diversification strategy.

UMR Corem agreed that the reasons for Germany's failure to raise €6bn in its bond auction were to be found in the relatively low risk premium Bunds offer compared to other euro-zone counterparts.

Charles Vaquier, chief executive officer of UMR told IPE: "The risk premium on German Bunds is currently insufficient compared to other euro-denominated bonds and the return on investment is therefore too low for pension funds."  

Vaquier insisted that for any investors in France, French government bonds remain more attractive given their yield at 3.60% - against 2% for German 10-year Bunds - for the same AAA credit rating.
UMR is currently looking at taking a higher risk exposure by investing in government bonds issued by France, Italy and Spain.