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Citi

Bonds: Opportunities in TIPs, EM Debt and Variable-Rate Bank Loans

  • US Treasuries (UST): Within the space, Citi analysts prefer US Treasury Inflation Protected Securities (TIPS) and are underweight on short-term USTs, neutral intermediate and long-dated USTs. Like most bonds, TIPS have a high valuation, but the 14% drop in long-term UST prices in the year-to-date (as of 19 March 2021) has improved the return outlook. TIPS holders could directly earn gains in US consumer prices with Citi analysts expecting US consumer price inflation (CPI) to rise above 3% annualized for the remainder of 2021. While 10-year UST yields have risen 70 basis points year-to-date, it could range between 1.5% - 2.0% in 2021 before rising to 2.5% in the coming few years.

 

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  • Investment Grade (IG) US and Europe: Citi analysts are neutral on the IG space. Within US IG, low BBB credits are favored for yield pick-up, however interest rate risks have risen. While valuations are rich, continued dovish policy by the Federal Reserve could keep spreads supported during bouts of risk aversion. In European IG, spreads and yields have recovered, supported by improving risk appetite and European Central Bank (ECB) purchases. Selective opportunities are seen in lower quality IG and some cyclical sectors.

 

  • High Yield (HY) – US and Europe: Following sharp rallies in US HY bonds, Citi analysts prefer higher yielding variable-rate bank loans over bonds. Moving up in the capital structure could provide lower volatility, and its floating rate component may also provide some price protection during periods of rising interest rates. Within European HY, valuations have richened, though spreads still offer value compared to other parts of the European bond market, particularly amid the beginning stages of an economic recovery. EU policy and ECB purchases could help to indirectly support prices.

 

  • Emerging Market Debt (EMD): USD sovereign and corporate spreads have tracked developed market credit spreads tighter as the pandemic effect recedes, though valuations still look relatively attractive compared to similarly-rated US corporates. In particular, Citi analysts are overweight on Asian credit.

 

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