During the course of the 2012 the sovereign debt aspect of the Euro crisis has not been resolved, but certain things are moving in the right direction. The surprise has not come just from the monetary but also from fiscal policy. In the periphery most of the troubled countries have carried out painful fiscal adjustments and also the competitiveness gap has  been, in part, closed. Yet, the need for growth has to be resolved.

Nevertheless we, as all investors, move along with policy markers in uncharted territories, but do not forget sound fundamental principles. Therefore we tend to agree with those who state that risk-free government bonds may be overvalued if not in a bubble. Once their “safe-heaven status” vanishes, the bubble could burst. The case for a bubble could be more compelling in the future also for investment grade and high yield credits, where everyone is chasing yield right now to escape from financial repression and investment decisions tend to be distorted by unconventional monetary policies. However we think that there are still some appealing places to pick up yield in the Euro fixed income markets. High yield bonds have led and continue to lead the way. The same favorable view apply to investment grade bonds, although limited to financial while non-financial are approaching fully-valued levels. Euro Periphery should continue to attract money in the short-medium term given the current monetary policy setup.