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Could Bond Yields Continue to Rise post the 7-year high?

10 October 2018Equities
Could Bond Yields Continue to Rise post the 7-year high? - Market Insights by Citibank UK

Although 10-year US Treasury (UST) bond yields briefly breached 3% in September – a level not seen since May, when it touched a seven-year high – Citi believes long-dated UST yields could remain contained by trade wars, emerging market (EM) volatility and relatively slower non-US growth despite strong US fundamentals and rising inflation. Citi's Q4 target for 10-year UST yields is 2.75%.

US investment grade (IG) corporate bonds: Yield levels at seven-year highs have created an attractive opportunity for investors, particularly at the short-end. In September, the yield difference between short- and long-term IG reached its flattest level since 2009. Citi analysts are overweight on US IG corporate bonds and favor energy as well as financial sectors.

Citi Analysts' forecast for US Treasury Bonds, Investment Grade Bonds and EM Debt - Market Insights by Citibank UK

US high yield (HY) bonds: Fundamentals are still strong and relative value exists compared to other markets. Default rates at 2.8% also remain below historical averages and could fall further. Lower defaults should also contain spreads and keep borrowing costs low. Citi analysts favor US bank loans – which benefit from rising short-term rates and lower volatility – and lower quality HY bonds over high quality HY bonds.

EM debt: EM asset volatility has concerned investors, though Citi analysts warn that EM countries with problems specific to their own market do not represent the entire EM world. Citi analysts remain overweight on EM debt as fundamentals still appear much more robust when compared to previous EM downturns. Citi favors Latam (USD-denominated and local currency) as well as EM Asian and EMEA local currency bonds. Recent cheapening in markets on the back of USD strength are attractive opportunities

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