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Nov. 13 (Bloomberg) -- Allianz SE, Europe’s biggest insurer, said low interest rates have caused a bubble in the government bond market and may do the same to equities unless central banks tighten monetary policy.

“We have a bubble in sovereign debt, looking at German Bunds, with central banks flooding the markets with liquidity,” Maximilian Zimmerer, management board member in charge of finance and global life insurance, told reporters at an event in Frankfurt today.

Returns on German and Swiss sovereign two-year bonds turned negative in July as investors bought them for riskier assets such as Italian and Spanish debt due to concern over a common rescue plan for the euro area. European Central Bank President Mario Draghi has lent financial institutions more than 1 trillion euros ($1.27 trillion) since December and has pledged cheap, unlimited cash for banks.

Zimmerer, 54, said Allianz’s asset management division is diversifying its investments to reduce risk. It’s cutting German debt holdings as returns have fallen to “unattractive levels,” he said. Allianz asset management includes Pacific Investment Management Co., the Mohamed El-Erian and Bill Gross-led business.

Yields on German two-year Bunds fell to a record -0.091 percent on July. 31 and were at -0.038 percent at 5:30 p.m.

Allianz has reduced its exposure to government debt in Portugal, Italy, Ireland, Greece and Spain, while increasing investments outside the euro area, Zimmerer said.

Share Prices

The price of equities may also become over-inflated unless central bank policy makers raise interest rates, Zimmerer said.

“We hope that interest rates will rise at the latest in two years as otherwise we are heading into a new bubble” for the stock markets, he said.

Allianz asset management will increase real-estate investments over the next five years to 30 billion euros from 20 billion euros as returns look better there, Zimmerer said.

“We want to grow over-proportionally in real estate and infrastructure lending,” he said. “There are very attractive projects offering spreads of 2 percent to 4 percent.”

Asset management’s contribution to the operating profit of Allianz almost tripled over the past five years. Growth was driven by Pacific Investment, which it acquired more than a decade ago.

Allianz granted Pimco more independence last year when it separated the Newport Beach, California-based unit from its other asset management operations, which come under the Allianz Global Investors division, led by Elizabeth Corley. Both units are combined under the Allianz Asset Management holding.

Zimmerer, who has a PhD in law from the University of Cologne, previously worked as head of Allianz’s German life insurance unit. He first joined the company in 1988 and was also employed at its equity, fixed income and private health insurance divisions.

To contact the reporter on this story: Annette Weisbach in Frankfurt at

To contact the editor responsible for this story: Frank Connelly at

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