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Fixed Income

Staying Selective on Bonds

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  • Since August, global bond returns have been negative and most bond yields have risen slightly. While Citi analysts do not expect losses for most diversified bond investors in the year ahead, global bond yields have fallen to a record low 1.6% (0.6% ex-US). As such the Citi analysts remain underweight on the asset class overall but continue to be selective in certain segments as markets continue to digest global headwinds.

 

  • High quality US fixed income. While avoiding negative-yield bonds in local markets, Citi’s Global Investment Committee (GIC) holds overweights in high quality US fixed income (US Treasuries and US Investment Grade Corporates). US dollar market still offer some of the better yield opportunities in the world on a relative basis.

 

  • Extend duration in high quality bonds. Sitting on too much cash or rolling short-term US T-bills runs the risk of frequent reinvestment at very low or lower rates. With policy rates expected to head lower, Citi analysts prefer to lock in yields in longer maturities. The preferred market for duration extension in US investment grade (IG) corporate bonds, where curves are relatively less flat and investors are rewarded with wider spreads in longer maturities.

 

  • External emerging market (EM) debt. As developed market (DM) yields drop, the attractiveness of emerging market (EM) bonds increases. Average global EM USD aggregate benchmark yields at 4.9% are 370bp higher than DM markets (1.2%) and 450bps higher than non-US dollar DM yields. Within EM, Asian EM USD yields are closer to 3.5%, but offer more price stability compared to their Latin American counterparts.

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