Citi Wealth Insights

Fixed income is highly vulnerable to rising inflation and deliberately suppressed interest rates. That said, Citi analysts see some attractive areas within fixed income.

With help from Friday’s “mere” quarter million job gains, long-term US yields have risen only half as much as they did in the immediate aftermath of the Global Financial Crisis. Citi analysts believe the largest reason yields have not risen faster is the near-record level of COVID-19 infections globally, in spite of vaccine success in developed markets. In Citi’s view, it is only a matter of time and vaccinations before the global recovery accelerates and Citi analysts expect bond yields to reflect a substantial change in economic activity.

Citi’s Global Investment Committee remains underweight global fixed income but have added to their allocation in US variable-rate bank loans.

With effective vaccinations surging and infection rates falling, Citi analysts expect global GDP growth to rebound to 5.5% in 2021 and 4.0% in 2022. Despite risk of inflation and higher yields, rising yields are unlikely to signal the end of the equity bull market, as earnings growth in 2021 and 2022 are expected to offset higher and more normal levels of interest rates rising from ultra-low levels. Citi’s Global Investment Committee thus increased its Overweight in Equities, reduced its Underweight in Bonds and reduced Gold from Overweight to Neutral. Real Estate Investment Trusts (REITs) remain Overweight while Cash remains Underweight.

Citi’s Global Investment Committee remains underweight global fixed income, but sees an improving return outlook for TIPS and opportunities in EM debt and variable-rate bank loans.

Citi analysts expect the yield curve could continue to steepen and prefer a diversified set of fixed income alternatives that could help provide some mitigation to rising yields.