Cautious stance needed in risky peripherals

ON BONDS

AllianceBernstein's Arif Husain on why investors should still be wary of eurozone sovereign risk.

Amid growing concern about peripheral eurozone countries, government bond investors have become wary of sovereign risk in general. There are three broad types of risk attached to bonds: interest-rate risk, credit risk, and liquidity risk. Credit risk is the most corrosive, as it leads to destruction of value. A government’s credit risk is driven by willingness and ability to repay debt. This is influenced by the amount of debt, cost of servicing, and ability to refinance. The amount of debt does not start to bite until interest costs get too high or a country can no longer refinance i...