Investors should be more worried about the risk of Greece defaulting on its loans than the potential impact of inflation, according to RWC Partners' head of absolute return bond strategies, Peter Allwright.
He says government bonds are the only asset class pricing in Greece's default risk, leaving all the remaining asset classes dangerously exposed.
Should Greece be forced to restructure its debt, there is a risk that Spain, Portugal and Ireland would also default, leading to more de-leveraging and causing European sovereign banks to rein in lending.
“Of most concern to me is that investors are too complacent about the risk of contagion and default in the European bond markets,” said Allwright. “The fact that government bonds are clearly pricing in default and re-profiling to a greater extent than any other asset means someone is wrong and is going to get burnt.”
Allwright says it is important to remain liquid and flexible in light of the Greek default risk. His fund has a core allocation to short duration, high-grade bonds supplemented by alpha strategies on the bond and currency markets.
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