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A Relative Preference for High Yield and Emerging Markets

  • US Treasuries (UST): Citi’s Global Investment Committee (GIC) is neutral on USTs, with long-term yields expected to rise on fiscal expansion or a COVID-19 vaccine, thus pushing prices lower. Short-term yields are likely to stay low, with the Federal Reserve (Fed) possibly on hold until 2024.


  • Investment Grade (IG) – US and Europe: Overall US IG index spreads appear fully valued.  That said, Citi analysts remain comfortable moving down in quality for more attractive opportunities and prefer sectors that may benefit from a cyclical economic recovery. The greater risk for IG corporates could be rising rates, thus the belly of the yield curve (5-7 years) is preferred. In the Europe IG space, spreads and yields have largely recovered, driven by ECB support. Selective opportunities exist, but a weaker dollar may negatively impact flows. Overall, Citi analysts are neutral on IG corporates.


  • High Yield (HY) – US and Europe: Like most other risk assets, US HY spreads have largely recovered from the global sell-off in 1Q. Citi analysts consider sector composition when gauging value in HY. US HY indices have been weighed down by its larger exposure in COVID-19 cyclical sectors – where Citi analysts find most favorable risk-reward, with the Fed willing to backstop any deterioration in financial conditions. “Fallen Angels”, or IG issuers that have been downgraded into HY, are also preferred.




  • Emerging Market Debt (EMD): USD EM aggregate index spreads are still 100bps wide to early 2018 levels. And with a quarter of the world’s fixed income markets trading with yields below zero, the 4.4% yield in USD EM markets is attractive. In local currency EM bonds, yields have risen since all-time lows reached in May. However, recent outperformance is largely driven by currency strength and a weaker USD view could support future returns for unhedged investors.


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