Slow growth and fading inflation pressures could keep rates low. In Citi's view, curves are likely to bull-flatten further but gains appear poised to be less robust.
Citi analysts favour non-financial issuers in the US, where fundamentals are solid, balance sheets are strong and liquidity is robust. On the other hand, despite relatively decent valuations, high yield bonds are likely to remain volatile as long as risk appetite remains depressed.
The UK is not immune to the periphery problems in continental Europe. However, gilts are benefiting from the Bank of England's decision on October 6 to boost its bond purchase program from €200 billion to €275 billion. Gilts also benefit from the government's renewed commitment to its austerity plan on November 30, which solidifies the UK's AAA rating. Long-dated UK gilts, which generated the most impressive bond returns of 2011, remain Citi's preference.
Emerging Market Debt
Spreads are still attractive as improving fundamentals and credit quality of emerging market debt provides investors with a way to diversify their sovereign holdings from developed markets.