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Citi

Taking on Credit Risk in Fixed Income

  • US Treasuries (UST): USTs, once the most attractive sovereign bond market, has now joined the rest of the low yield world. With 10-year UST yields sitting around 0.65%, the overall global bond market now yields 1.0%. Federal Reserve (Fed) policy has also had a notable impact on real US yields (adjusted for inflation) and the US real yield curve is now in negative territory. As such, Citi’s Global Investment Committee (GIC) is neutral USTs.

 

  • Investment Grade (IG) – US and Europe: IG corporate bonds have been a part of the European central Bank’s (ECB) quantitative easing program for many years and the Fed has also started purchasing corporate bonds in recent months. Thus, these high quality markets have normalized, spreads have narrowed and yields have fallen to historical lows and Citi analysts are neutral on this space. Among US IG, Citi analysts prefer BBB-rated debt within 5-7 years to maturity. In the Europe IG space, selective opportunities in cyclically oriented sectors are preferred.

 

  • High Yield (HY) – US and Europe: The Fed has become a clear buyer of certain US HY bonds, which has helped a recovery from March lows. Despite the impressive turnaround, Citi analysts are overweight US HY and still see their yield spreads as relatively attractive (averaging near 5.5%). “Fallen Angels” – HY issuers that were once IG – are preferred. Some caution is warranted given near-term risks such as US election but the continued Fed support could keep any meaningful widening contained. ECB purchases of IG corporates could also continue to have a trickle-down effect in Europe HY and support spreads.

 

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  • Emerging Market Debt (EMD): While EM bond valuations have risen, Citi analysts think the greater rally in higher quality assets has kept the value proposition attractive. USD EM bonds are one of the few global markets to offer positive real yields and Citi analysts are overweight this space. However, EM exposures should be kept globally diversified and the lack of Fed involvement could also keep spreads more volatile during pullbacks.

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