Which investment is preferable in the euro zone: Peripheral sovereign debt of reasonable credit quality (e.g. Italy) or investment grade credit (corporate and bank bonds)?

- "Euro-zone investors are faced with the following dilemma: they can obtain a yield that is at least as high on euro-zone peripheral sovereign debts of reasonably good credit quality that are reasonably liquid (Italy, possibly Spain) as on investment grade companies or banks. Has sovereign risk really become greater than corporate risk, or is there a discrepancy between the valuations of the two types of debt?"
- "We believe that:• the sovereign risk on Italy is insignificant;• the sovereign risk on Spain is harder to evaluate;• corporate and bank default risk is 13 bp (A) to 30 bp (BBB) per year, and at present corporate profitability is rising again rapidly."
- "The best portfolio is probably one diversified in Italy, corporates and senior bank debt."

Natixis Flash Economics 439 20100906