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.
In the UK, the recent ratings statement has had very little impact and as long as the coalition is able to maintain its strong fiscal stance, Citi analysts see no reason for Gilt investors to be overly concerned. The greater risk to Gilts would be a weakening of the government's position and a reversal of fiscal tightening; something that Citi analysts think could very likely trigger a rapid response from ratings agencies and the markets. Assuming that does not happen, they see the combination of fiscal restraint, weak growth and quantitative easing as supportive for Gilts.
Emerging Market Debt
Spreads are still attractive as improving fundamentals and credit quality of emerging market debt provide investors with a way to diversify their sovereign holdings from developed markets.