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Bonds: Staying Selective in a Low Rate Environment

  • US Treasuries (UST): Citi analysts are underweight short-term USTs, neutral intermediate and long-dated USTs, while holding an overweight in Treasury Inflation Protected Securities (TIPS). Large scale fiscal packages have temporarily put a floor in long-dated yields, while the Federal Reserve (Fed) has cut short-rates to zero, diminishing the appeal of cash. Fed asset purchases may limit how far long-dated yields can ultimately rise, though Citi analysts expect some rebound in rates in a 2021 cyclical recovery.


  • Investment Grade (IG) – US and Europe: Spreads of corporate yields over government yields have narrowed substantially and absolute yields have fallen to historical lows. However, the Fed’s accommodating stance on broader monetary policy is likely to remain supportive for the market. Citi analysts favor select opportunities among USD BBB-rated issuers, which yield around 2.1% where spreads have some scope for additional tightening. In Europe, BBB-rated euro-denominated bonds only yield an average 0.75%, but this is relatively attractive given that negative rates predominate in the euro-area.



  • High Yield (HY) – US and Europe: Sub-investment grade bond returns could still be supported by rebounding economic activity in the years to come, but after a sharp credit market rebound, Citi analysts have shifted US HY allocation from bonds to variable rate loans. This adds to yield in an asset which also has lower historic volatility than comparable bonds. In Euro HY, spreads may still offer value amid the beginning stages of an economic recovery. EU policy and ECB purchases are likely to indirectly support prices.




  • Emerging Market Debt (EMD): USD sovereign and corporate spreads have fully recovered, though valuations still look relatively attractive when compared to US corporates. Within the space, Citi analysts have resumed an overweight in Asian EM debt. In local currency EM bonds, yields have fallen to lowest levels on record. Future returns may be predicated on FX, where continued USD weakness may help support performance.



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