A Relative Preference for High Yield and Emerging Markets
By Jessica Tan
With real rates in negative territory, Citi’s Global Investment Committee is underweight global fixed income, preferring US and European high yield bonds and emerging markets credit.
With negative real interest rates in the US, Citi analysts prefer taking on credit risk to interest rate risk. US high yield and emerging market debt are preferred among global fixed income.
Citi analysts see potential opportunities in US high yield (HY) corporates, and in particular – HY corporate bonds that were once investment-grade but have since been downgraded.
Following a confirmed COVID-19 treatment, global yields may rise. Equities may also rally modestly on a post COVID-19 recovery, but performance dispersion may see winning and losing sectors rotate.
Within global fixed income, Citi analysts are overweight US bonds such as Treasuries and Investment Grade debt, and USD Emerging Market Debt. Global High Yield remains neutral.
With central banks rolling out unprecedented levels of monetary easing, interest rates are expected to stay lower for longer. Cyclical-oriented sectors in US Investment Grade corporates may benefit in a new economic cycle, while Emerging Market Debt offer compelling valuations.
