The third quarter saw another round of monetary stimulus measures by the Fed and the ECB that exceeded market expectations: interest rates corrected upward from their lows and riskier asset classes recorded good results. 

It is clear from the latest decisions by the central banks that the low interest rate environment and financial repression remain a reality. While the European debt crisis is now unlikely to escalate, the structural problems remain unresolved.

The Fed is clearly committed to financial repression for the immediate future, continuing its programme of quantitative easing.

Interest rates will remain low, come what may. Other major central banks are also sticking to unconventional stimulation, for example in Japan. 

The ECB made significant progress by announcing unlimited, but conditional, bond purchases. 

Together with the fiscal package and the permanent European Stability Mechanism rescue facility, unlimited bond purchases create a strong barrier to prevent the European debt crisis from escalating. Does this mean the crisis is over?

Certainly not, the same challenges still lie ahead; the underlying structural issues such as the stabilisation of public sector budgets; the return to growth and employment; improving competitiveness and developing a shock-resistant banking system, all of which will require tremendous effort.

In addition to the joint efforts being undertaken in Europe, the willingness and real concrete progress of each individual country in political and economic terms will take centre-stage and determine the development of risk premiums and bond yields. 

The euphoria following the central banks’ decisions has forced some corporate bond risk premiums to levels where caution is increasingly called for, and debtor selection is becoming extremely important.

The demand for attractive new issues shows no sign of abating and is somewhat alarming, and indeed consolidation is possible after the recent spread rally. We think top-rated, short-term bonds in particular are becoming expensive and should be avoided.

On the other hand, globally oriented industrial securities, some utilities that have lagged behind recently, and selected financial bonds offer attractive risk premiums while individual bonds issued by companies from the European peripheral states are also worth considering. 

The European market for asset-backed securities (ABS), which was considered highly speculative until recently, has benefited since 2007 from a move towards more stable structures and better collateral quality.

Although the risk premiums for European ABS have fallen to 2008 levels, they remain attractively valued.

The risk premium for first-class UK RMBS, in other words securities collateralised by residential property mortgages, is 0.75 per cent. 

It is 1.0 per cent and 0.27 per cent respectively for Dutch RMBS and auto ABS. It is because ABS securities are still considered complex and not very liquid that the valuations are still far from the highs of 2007. 

By comparison, the current risk premiums for covered bonds have already returned to those previous high levels.

Because the default risk is limited on the senior tranches of the better collateral, and the liquidity premium of these securities should continue to fall, we think ABS offer an interesting investment alternative in an uncertain environment with low interest rates.

Bernhard Urech and Laurence Kubli are portfolio managers at Swiss & Global Asset Management. The views expressed here are their own.